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World Financial Leaders Nudge China Toward Revaluation Of The Yuan

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* APRIL 26, 2010, 7:37 A.M. ET

World Financial Leaders Nudge China Toward Revaluation Of The Yuan

By Michael Casey and Min Zeng

WASHINGTON (Dow Jones)--Concerns over China's exchange rate policy were absent from public statements that world financial leaders released after weekend meetings here. But officials from several countries used the forum to nudge Beijing toward a revaluation of its currency, the yuan, a move that analysts see as increasingly likely before the end of this quarter.

In voicing their concern that an undervalued yuan creates distortions in world trade and financial flows, officials opted for diplomatically polite language. Some China watchers say such subtle expressions of concern are likely to prove more fruitful than tough talk of sanctions against Beijing, such as those pushed by Sen. Charles Schumer (D-NY).

Chinese officials have repeatedly said they will not bow to foreign pressure to revalue the yuan. U.S. Treasury Secretary Timothy Geithner may have had this in mind when, speaking after the ministerial meetings Friday he said currency reform is "China's choice" and that he believes it "will decide it's in their interest." Later, in a presentation to the oversight board of the International Monetary, Geithner urged large emerging economies to "return to market-oriented exchange rates, where appropriate" without specifically naming China.

Olli Rehn, the European Union's commissioner for economic and monetary affairs, was more blunt. Before the same IMF committee, he said "the Chinese authorities are encouraged to implement soon a more flexible exchange rate regime," a move that would "contribute to stability by reducing current account imbalances."

Meanwhile, in an interview, Brazilian Central Bank governor Henrique Meirelles said adjustments to "exchange rate regimes are part of the overall question" of rebalancing the world economy. It is just one part of the mechanism through which current account surplus countries like China become more dependent on domestically led growth while consumption-heavy countries like the U.S. can increase their savings, he said.

"It is increasingly obvious that not only the U.S., but also Europe and some emerging market countries that are members of the G-20 believe that greater flexibility in the renminbi [yuan] is good for both China and the global economy," said Stephen Jen, managing director of macroeconomics at hedge fund BlueGold Capital in London. But "the lack of any reference" in a communique issued by finance ministers from the Group of 20 major economies "to what is an obvious opinion in the world suggests that the G-20 [countries] are refraining themselves in order to respect Beijing's wishes."

Jen added that in any case the G-20 makes decisions by consensus, which meant that China would have vetoed any such reference in the document.

Jim O'Neill, chief economist at Goldman Sachs in London, said the subtle diplomacy effort suggests U.S. and other G-20 officials "perhaps also know that China has decided to move." The prospect of a revaluation has been made more likely by recent comments from Chinese officials suggesting that they "are waiting for the right time" to do so, he said.

Officials at the People's Bank of China are believed to favor letting the yuan rise against the dollar because it would complement other monetary tightening measures aimed at calming inflationary pressures and curtailing bubbles in the country's high-end real estate market.

The challenges these PBOC officials face, analysts say, are both political and technical.mg

On the one hand, they face opposition from other factions within the Chinese government--notably, from the Commerce Ministry--who want to keep the yuan-dollar peg in place to the benefit of China's export-orientated industrial establishment. And on the other, there is the complicated task of timing and communicating a yuan revaluation.

A gradual increase over time would meet the government's preference for incremental changes and minimize the economic shock, but it might also backfire, encouraging yet more speculative investment from people seeking to profit from a guaranteed exchange gain over time. As such, any future announcement on the timing, magnitude and mechanism for a revaluation is expected to be deliberately ambiguous.

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