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Roubini Says ‘Super Cautious’ China to Limit Yuan Gain to 4%

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Roubini Says ‘Super Cautious’ China to Limit Yuan Gain to 4%

By Ye Xie

March 8 (Bloomberg) -- China will limit the yuan’s appreciation to 4 percent over the next 12 months because of a “super cautious” outlook on the global economy, said New York University Professor Nouriel Roubini.

The central bank may end a 20-month peg to the dollar as soon as the second quarter, allowing a 2 percent one- step gain, and then let the currency strengthen another 1 percent to 2 percent in 12 months, Roubini said in an interview in New York. The yuan rose 21 percent between July 2005 and July 2008, when the government halted its advance to protect exports during the global recession.

Roubini’s forecast is less aggressive than the median estimate in a Bloomberg survey of 20 analysts for the yuan to rise 5 percent to 6.50 per dollar by March 31, 2011. Chinese central bank Governor Zhou Xiaochuan said on March 6 that the nation should be “very cautious” in exiting policies adopted during the global financial crisis, including the exchange-rate stance.

“It will be less than what they did in 2005 when everything was going right,” Roubini, 51, who anticipated the global financial crisis, said in the March 4 interview. “They will move by a token amount. The world is much cloudier in every dimension. They are super cautious.”

‘Hard Landing’

Roubini, who chairs New York-based Roubini Global Economics LLC, has become famous for his pessimistic projections. In 2007, he correctly predicted a “hard landing” for the world economy. He said last year that the global economy would shrink through 2009, only for growth to resume in the middle of the year.

Jim O’Neill, the chief Goldman Sachs Group Inc. economist who coined the term BRICs for Brazil, Russia, India and China in 2001, said last month that “something is brewing” on the yuan and predicted policy makers will allow a one-time 5 percent gain. Twelve-month non- deliverable forwards traded at 6.6505 per dollar, indicating bets the yuan will rise 2.6 percent from the spot rate of 6.8265.

“We must be very cautious about the timing of normalizing the policies, and this includes the renminbi rate policy,” Zhou said at a press briefing in Beijing, using another term for the Chinese currency. A global recovery “isn’t solid,” he said.

‘Sooner or Later’

China will exit its crisis policies “sooner or later” as it balances growth and inflation concerns, Zhou said. Regulators ordered banks to set aside more cash as reserves and to curb lending after the economy grew 10.7 percent in the fourth quarter, the most in two years.

Consumer prices probably climbed 2.5 percent in February from a year earlier, the biggest increase since October 2008, compared with 1.5 percent in January, according to the median estimate from 29 economists. A stronger currency would reduce import prices and may reduce the need to sell yuan for dollars to maintain the peg.

“A bit of move in the currency might help,” Roubini said. “If they move it by 2-3 percent, it won’t make a huge difference to inflation pressure. They are always cautious and won’t bow to the pressure from the U.S.”

While President Barack Obama has urged China to let the yuan climb to aid U.S. manufacturers, Chinese exporters say a gain of more than 2 percent may wipe out profits.

Export Recovery

China’s overseas shipments rose 21 percent in January from a year earlier, the fastest pace in 16 months. Fifteen U.S. senators called for stiffer tariffs on China’s imports last week, accusing the country of artificially keeping the yuan cheap. A stronger yuan would increase the purchasing power of Chinese residents and reduce the country’s reliance on exports.

“Most people are concerned about inflation, I am worried about the export-led growth model,” said Roubini. “A weak currency and low interest rate is a massive transfer of wealth from household income to enterprises. It will take more than three, five years to change China’s model of growth.”

Options traders are increasing their bets on the currency. Three-month implied volatility, a measure of expectations for yuan price movements, showed traders expected swings of 3.27 percent on March 4, a one-year high, up from 1.07 percent on Jan. 1. The next day the measure slumped to 2.8 percent as Premier Wen Jiabao said China plans to keep the currency “basically stable.”

“The Chinese authorities will be in no rush to further strengthen their currency,” said Joe Craven, the Asia-Pacific head of currencies and fixed-income at UniCredit Markets & Investment Banking in Hong Kong. “I view options volatility as being currently too high, especially in the shorter-end of the curve.”

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