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China Conducts Yuan Stress Tests, Trade Chamber Says (Update2)

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China Conducts Yuan Stress Tests, Trade Chamber Says (Update2)
March 18, 2010, 4:18 AM EDT

March 18 (Bloomberg) -- China is conducting stress tests to gauge the effect of yuan appreciation on companies, a sign the government may be preparing for policy change even as it rebuffs foreign criticism of its 20-month dollar peg.

The China Council for the Promotion of International Trade is conducting yuan tests at more than 1,000 companies in 12 industries, Vice Chairman Zhang Wei told a press briefing in Beijing today. He said policy makers should delay the resumption in gains to give exporters more time to recover from the global recession. The yuan’s 12-month forwards climbed 0.1 percent to 6.6642 per dollar.

Foreign pressure has intensified since Premier Wen Jiabao on March 14 said the yuan isn’t undervalued and said criticism of China’s policy amount to “protectionism.” Forward contracts reflect bets the yuan will strengthen 2.4 percent from the spot rate of 6.8265 in the coming year as the central bank seeks to curb the cost of import prices and rein in inflation.

“This could be a sign they are looking into the option of renminbi appreciation,” said Liu Li-Gang, an economist at Australia & New Zealand Banking Group Ltd. “Whether this will indicate an imminent appreciation is not yet certain.”

China has kept the yuan little changed at around 6.83 per dollar since July 2008 to help exporters survive the global financial crisis. The central bank allowed the currency, also known as the renminbi, to strengthen 21 percent since a peg against the dollar was scrapped in July 2005. Liu expects yuan will start rising as early as the second quarter, and it may gain as much as 5 percent by year-end.

Stress Tests

Electronics and machinery industries are the most affected because they have signed $150 billion in export orders this year, which may lose value in yuan terms, he said. Processing manufacturers, such as textiles and furniture makers, which have profit margins as low as 3 percent, would “immediately face bankruptcies,” according to Zhang.

“Even if the yuan has a slight appreciation, they’ll be dead,” he said. The results of the tests will be announced before April 27, said Zhang.

China’s foreign ministry spokesman Qin Gang said today the yuan’s value is “not the main cause” of the U.S. trade deficit, hours after Jon Huntsman, U.S. Ambassador to China, said that the Obama administration hopes “to see more flexibility” in the way the yuan is managed.

U.S. senators including Charles Schumer and Lindsey Graham revived legislation this week that would require the U.S. to determine if a nation’s currency is misaligned and would make it easier to impose import duties if the currency was deemed to be undervalued.

Political Football

U.S. lawmakers are playing political football by pressing China to boost the value of its currency, which isn’t particularly undervalued, Goldman Sachs Group Inc. Chief Economist Jim O’Neill said yesterday at a press conference in London.

The concern in Congress “is sort of understandable but it misses the point,” O’Neill said. It’s “the equivalent of a football” and is part of “the usual hobby of bashing China,” he said.

Central bank Governor Zhou Xiaochuan said March 6 China will exit its crisis stance, including the exchange rate policy, “sooner or later.” He also said the nation should be careful about halting the anti-crisis measures.

“It’s only a matter of time,” said Emmanuel Ng, a currency strategist at Oversea-Chinese Banking Corp. in Singapore. “We expect the yuan to rise around the middle of this year.”

The one-month forward contract was little changed at 6.8160, reflecting traders bets that “Chinese authorities will probably not yield to foreign pressure” immediately, said OCBC’s Ng.

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