Published February 19, 2010
China seen revaluing yuan by 5% very soon
(LONDON) China may let its currency appreciate 5 per cent as early as next month to prevent economic growth from stoking inflation, according to Stephen Jen of BlueGold Capital Management LLP.
Policymakers may also raise interest rates this year to cool an economy that expanded 10.7 per cent in the fourth quarter of 2009, the fastest increase in two years, Mr 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 Mr Jen, who helps to oversee about US$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's 'first challenge is inflation expectations', People's Bank of China deputy governor Zhu Min said on Jan 30.
Goldman Sachs Group Inc chief economist Jim O'Neill said on Monday that a decision by China to revalue the currency as much as 5 per cent 'could happen at any time'.
China has resisted allowing the yuan to strengthen as it seeks to support exports, which declined for 13 straight months before rising last December.
The last time the government revalued the yuan, or renminbi, was on July 21, 2005, when it dropped its currency peg, letting it appreciate 2.1 per cent to 8.11 per dollar.
'A stable renminbi is good for both the Chinese economy and the world,' Vice-Commerce Minister Zhong Shan said last week.
The central bank's decision to raise reserve requirements came after banks extended 19 per cent of the 7.5 trillion yuan (S$1.54 trillion) of targeted loans for the year in a single month and property prices climbed the most in 21 months.
China has controlled the yuan's exchange rate since July 2008 by buying the US currency, keeping it at about 6.83 per dollar. The yuan strengthened 21 per cent 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 Mr Jen.
The US and China, with US$409 billion in annual trade, have been engaged in a spat over allegations of dumping and subsidies. China says US complaints are signs of protectionism; the US says it is enforcing trade rules.
'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 Mr 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 Mr 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 Mr Jen. 'It will provide China with a mechanism to defend its currency.'
Mr 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 US currency during times when the economy is either in a deep slump or growing strongly, and underperformance at times of moderate growth. -- Bloomberg
China seen revaluing yuan by 5% very soon
(LONDON) China may let its currency appreciate 5 per cent as early as next month to prevent economic growth from stoking inflation, according to Stephen Jen of BlueGold Capital Management LLP.
Policymakers may also raise interest rates this year to cool an economy that expanded 10.7 per cent in the fourth quarter of 2009, the fastest increase in two years, Mr 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 Mr Jen, who helps to oversee about US$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's 'first challenge is inflation expectations', People's Bank of China deputy governor Zhu Min said on Jan 30.
Goldman Sachs Group Inc chief economist Jim O'Neill said on Monday that a decision by China to revalue the currency as much as 5 per cent 'could happen at any time'.
China has resisted allowing the yuan to strengthen as it seeks to support exports, which declined for 13 straight months before rising last December.
The last time the government revalued the yuan, or renminbi, was on July 21, 2005, when it dropped its currency peg, letting it appreciate 2.1 per cent to 8.11 per dollar.
'A stable renminbi is good for both the Chinese economy and the world,' Vice-Commerce Minister Zhong Shan said last week.
The central bank's decision to raise reserve requirements came after banks extended 19 per cent of the 7.5 trillion yuan (S$1.54 trillion) of targeted loans for the year in a single month and property prices climbed the most in 21 months.
China has controlled the yuan's exchange rate since July 2008 by buying the US currency, keeping it at about 6.83 per dollar. The yuan strengthened 21 per cent 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 Mr Jen.
The US and China, with US$409 billion in annual trade, have been engaged in a spat over allegations of dumping and subsidies. China says US complaints are signs of protectionism; the US says it is enforcing trade rules.
'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 Mr 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 Mr 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 Mr Jen. 'It will provide China with a mechanism to defend its currency.'
Mr 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 US currency during times when the economy is either in a deep slump or growing strongly, and underperformance at times of moderate growth. -- Bloomberg