BlueGold’s Jen Says China May Revalue Yuan By 5% Next Month
February 17, 2010, 07:16 PM EST
By Anchalee Worrachate
Feb. 18 (Bloomberg) -- China may let its currency appreciate by 5 percent as early as next month to prevent economic growth from stoking inflation, according to Stephen Jen of BlueGold Capital Management LLP.
Policy makers may also raise interest rates this year to cool an economy that expanded by 10.7 percent in the fourth quarter, the fastest increase in two years, Jen said in an interview this week. The central bank last week ordered lenders to boost the amount of cash they must put aside as reserves for the second time this year in an attempt to curb growth in loans.
“China is taking steps in the right direction, but the policies so far aren’t adequate,” said Jen, who helps to oversee about $1.5 billion as a managing director at BlueGold in London. “It will require a multi faceted policy approach to deal with such a big, and sometimes volatile, economy. We expect rate hikes, and we expect a policy change” on the yuan.
China has resisted allowing the currency to strengthen as it seeks to support exports, which declined for 13 straight months before rising in December last year. The last time the government revalued the yuan, or renminbi, was on July 21, 2005, when it dropped its currency peg, letting the currency appreciate 2.1 percent to 8.11 per dollar. “A stable renminbi is good for both the Chinese economy and the world,” Vice Commerce Minister Zhong Shan said Feb. 8.
The central bank’s decision to raise reserve requirements came after banks extended 19 percent of the 7.5 trillion yuan ($1.1 trillion) of targeted loans for the year in a single month and property prices climbed the most in 21 months.
‘First Challenge’
People’s Bank of China Deputy Governor Zhu Min said on Jan. 30 that his government’s “first challenge is inflation expectations” and it will “continue with current accommodative fiscal and monetary policy.” Goldman Sachs Group Inc. Chief Economist Jim O’Neill said on Feb. 15 a decision by China to let its currency strengthen as much as 5 percent “could happen at any time.”
China has controlled the yuan’s exchange rate since July 2008 by buying U.S. currency, keeping it at about 6.83 per dollar. The yuan strengthened 21 percent against the dollar in the three years before the nation adopted the policy.
Failing to allow more currency flexibility will increase the risk of inflation, trade protectionism and provoke further criticism from foreign importers of Chinese goods, according to Jen. The U.S. and China, with $409 billion in annual trade, have been engaged in a spat over allegations of dumping and subsidies. China says U.S. complaints are signs of protectionism. The U.S. says it’s enforcing trade rules.
‘Basket, Band, Crawl’
“The extent of the revaluation will depend on how exporters can handle the shock and how much of an upfront appreciation is required to discourage speculators,” said Jen. “Chinese exporters will find ways to remain competitive.”
China may adopt the so-called basket, band and crawl currency policy, or BBC, which is currently used by Singapore after the revaluation, according to Jen. Under the system, the Singapore dollar is managed against an undisclosed group of currencies, floating within a set policy band that limits its gains and losses.
“This currency regime will make a lot of political and economic sense for China,” said Jen. “It will provide China with a mechanism to defend its currency.”
Jen, who worked for 11 years at Morgan Stanley before joining BlueGold in May, developed in 2001 the “dollar-smile” theory, which predicts gains for the U.S. currency during times when the economy is either in a deep slump or growing strongly, and underperformance at times of moderate growth.
February 17, 2010, 07:16 PM EST
By Anchalee Worrachate
Feb. 18 (Bloomberg) -- China may let its currency appreciate by 5 percent as early as next month to prevent economic growth from stoking inflation, according to Stephen Jen of BlueGold Capital Management LLP.
Policy makers may also raise interest rates this year to cool an economy that expanded by 10.7 percent in the fourth quarter, the fastest increase in two years, Jen said in an interview this week. The central bank last week ordered lenders to boost the amount of cash they must put aside as reserves for the second time this year in an attempt to curb growth in loans.
“China is taking steps in the right direction, but the policies so far aren’t adequate,” said Jen, who helps to oversee about $1.5 billion as a managing director at BlueGold in London. “It will require a multi faceted policy approach to deal with such a big, and sometimes volatile, economy. We expect rate hikes, and we expect a policy change” on the yuan.
China has resisted allowing the currency to strengthen as it seeks to support exports, which declined for 13 straight months before rising in December last year. The last time the government revalued the yuan, or renminbi, was on July 21, 2005, when it dropped its currency peg, letting the currency appreciate 2.1 percent to 8.11 per dollar. “A stable renminbi is good for both the Chinese economy and the world,” Vice Commerce Minister Zhong Shan said Feb. 8.
The central bank’s decision to raise reserve requirements came after banks extended 19 percent of the 7.5 trillion yuan ($1.1 trillion) of targeted loans for the year in a single month and property prices climbed the most in 21 months.
‘First Challenge’
People’s Bank of China Deputy Governor Zhu Min said on Jan. 30 that his government’s “first challenge is inflation expectations” and it will “continue with current accommodative fiscal and monetary policy.” Goldman Sachs Group Inc. Chief Economist Jim O’Neill said on Feb. 15 a decision by China to let its currency strengthen as much as 5 percent “could happen at any time.”
China has controlled the yuan’s exchange rate since July 2008 by buying U.S. currency, keeping it at about 6.83 per dollar. The yuan strengthened 21 percent against the dollar in the three years before the nation adopted the policy.
Failing to allow more currency flexibility will increase the risk of inflation, trade protectionism and provoke further criticism from foreign importers of Chinese goods, according to Jen. The U.S. and China, with $409 billion in annual trade, have been engaged in a spat over allegations of dumping and subsidies. China says U.S. complaints are signs of protectionism. The U.S. says it’s enforcing trade rules.
‘Basket, Band, Crawl’
“The extent of the revaluation will depend on how exporters can handle the shock and how much of an upfront appreciation is required to discourage speculators,” said Jen. “Chinese exporters will find ways to remain competitive.”
China may adopt the so-called basket, band and crawl currency policy, or BBC, which is currently used by Singapore after the revaluation, according to Jen. Under the system, the Singapore dollar is managed against an undisclosed group of currencies, floating within a set policy band that limits its gains and losses.
“This currency regime will make a lot of political and economic sense for China,” said Jen. “It will provide China with a mechanism to defend its currency.”
Jen, who worked for 11 years at Morgan Stanley before joining BlueGold in May, developed in 2001 the “dollar-smile” theory, which predicts gains for the U.S. currency during times when the economy is either in a deep slump or growing strongly, and underperformance at times of moderate growth.