Yuan-$ de-peg this weekend?

Yuan-$ de-peg this weekend?
Venkatesan Vembu /mg DNA
Friday, April 30, 2010 2:18 IST


Hong Kong: The coming weekend marks the annual labour day holiday in China.

But, in the opinion of some economists, it could be a red-letter day in China for one other reason: the long-anticipated de-pegging of the Chinese renminbi (yuan) from the US dollar could happen over this weekend.

“We believe this upcoming weekend is a good window of opportunity for China to make a move on its currency,” notes Nomura Securities analyst Sun Mingchun.

There are several reasons why policymakers might seize this moment for this momentous move. The first of them is the fact that the external political atmosphere for them to make a move is benign, reasons Sun.

China has long been under pressure from the US and developed economies, but also of late among its peers in the developing economies’ ranks, to allow its currency to appreciate - and help in a rebalancing of the global economy. Chinese officials have been chary of being seen to be acting under external political pressure, and have repeatedly stated that any decision on the currency front - and even the timing of such a decision - would be taken in its own interest.

Propitious signals came from the meeting of the Group of 20 finance ministers last weekend, where “there was little public pressure on China to revalue.” This, says Sun, “could mean that the US and others have given China the autonomy to pursue the revaluation measure according to its own timetable.”

Additionally, the fact that the dates for the annual Sino-US Strategic and Economic Dialogue have been set for May 24-25 might accelerate movement on the currency front. “The Chinese authorities may not want the currency reform to occur immediately before or after this event to avoid giving the impression that the move was pressured by the US,” says Sun. And delaying the action until four weeks after that meeting would raise the political temperature in the US.

“They may therefore choose a date that is a little distant from that event (such as this week),” says Sun.

There is one final consideration that might prompt the weekend move: the fact that the upcoming weekend is a five-day holiday, and that the much-hyped Shanghai World Expo will be inaugurated on May 1.

“A reform during this long holiday, especially when the whole nation is focussing on the Expo, will help reduce the shock to the market,” reasons Sun.

The consensus among economists is that China will not go in for a one-off revaluation, as it did in July 2005, and that it will this time opt for a gradual appreciation of the yuan. One option, Sun believes, could be to switch to a Singapore-style regime, whereby the currency is managed against a basket of currencies, and keeping the trade-weighted exchange rate within a band, and tweak it twice a year.

It’s rather more likely, he adds, that China’s central bank, the People’s Bank of China (PBoC) will make small adjustments to its current regime, and manage the currency with reference to a basket of foreign currencies with daily trading bands for those that are currently traded in the Shanghai foreign exchange market.

Two adjustments seem likely, he adds: the PBoC may introduce more foreign currencies to be traded in the Shanghai forex market, and the yuan-dollar daily trading band may be widened from 0.5% to 1%.

Currently, only eight currencies can be traded directly against the yuan in Shanghai: the US dollar, Australian dollar, Canadian dollar, euro, pound sterling, yen and Swiss franc. Introducing more currencies, especially those of major trade partners such as the ruble, the Korean won and the Singapore dollar, could help deepen and broaden the market.

In any case, says Sun, no major appreciation of the yuan is likely after the reform, only a return to a gradual appreciation path that was in place before 2008, when the global financial crisis caused China to revert to the dollar peg. “We forecast 5% appreciation this year... A gradual appreciation should have only a limited impact on the real economy in ther near term.”

I hope this is accurate..sure sounds good anyway

Ck, count it as a tease till it comes true, in my opinion.

Lots of buzz that this is the weekend China finally revalues
April 30, 2010 at 13:10 GMT


There is a fair degree of nervousness that China will use a holiday weekend this weekend to revalue the currency. If they do not go this time, another holiday weekend in June is targeted by those in the know.

One more reason for traders to take some profits on long dollar positions versus the EUR and see where the dust settles early next week.

Special Report-Will China’s trade deficit derail Yuan revaluation?
April 30,2010

China posted a $7.24bln trade deficit in March. This was the first monthly trade deficit for China in almost 6 years. The deficit reflects weaker export sales to the US, rising energy costs and a surge in raw material prices. Exports rose by 24.3% and imports surged 66%. China’s minister of commerce said that the monthly deficit was a blip on the radar screen and that import and export levels were higher than March of 2008. According to the WSJ the Chinese trade deficit could ease pressure on China to make a change its currency policy and complicate efforts to persuade China to revalue the Yuan. It is not clear if today’s announcement of China’s trade deficit will be a barrier to reform of its currency regime.

Numerous reports suggest that China is on the verge of allowing a gradual appreciation of the Yuan. It seems that everyone has an opinion about Yuan revaluation and here is mine. First some background on the Yuan revaluation debate. The record global trade imbalance is seen as a reflection of China’s keeping the Yuan artificially low which encourages US and global demand for China’s goods. China intervenes to keep its currency undervalued to make Chinese exports more competitive. At the same time the US continues to borrow to buy Chinese imports. China’s economy relies heavily on export sales. The US relies heavily on China for cheap imports and to fund its debt. This contributes to the widening of the global trade imbalance and is seen as unsustainable. A number of economists believe that Yuan revaluation would help redress global trade imbalance buy leveling the playing field and force China to boost consumption and domestic demand. International pressure for Yuan valuation has intensified as the U.S. Congress prepares its semiannual currency report.

Some members of the U.S. Congress call for China to be named a currency manipulator if China does not take action to allow its currency to appreciate. Congress may also consider imposing trade sanctions on China. China would likely retaliate should the US name China a currency manipulator and impose sanctions. This could contribute to a rise in protectionism. Rising protectionism would be a major threat to the global recovery. The Congressional semiannual currency report will be delayed a month as US officials try to persuade China to allow the Yuan to be revalued. Last week the New York Times reported that the Chinese government is close to announcing a shift in it’s currency policy and that China will soon allow a gradual Yuan revaluation. The Chinese president will meet with US officials later this week and there is hope that this meeting may help to resolve US/Chinese tensions over the Yuan. Chinese officials have sent mixed signals in regard to the possibility of Yuan revaluation. China’s Prime Minister Wen has indicated that China will not buckle to international pressure to revalue its currency. PBOC officials indicate that China could move to a managed float.

Because China fixes the value the Yuan it is difficult for China’s central bank to control China’s money supply. The current strength of China’s economic recovery contributes to a sharp increase in domestic growth, a surge in the money supply and inflationary pressures in the real estate market. In an effort to slow inflationary pressures China has increased its reserve ratio and taken actions to curb lending. If China allows the Yuan to revalue it will give the Chinese central bank an additional tool to help to curb inflationary pressures and allow the Chinese central bank to have greater influence over the money supply. This could help China avoid asset bubbles. Yuan revaluation would also contribute to cheaper imports, reduce the cost of China’s foreign debt obligations and help make the Chinese economy become more productive and less dependent on exports. The main negative of Yuan revaluation for China is that it could contribute to slower growth and weaker export sales. The impact of Yuan revaluation for China’s economy should be modest because any shift in its currency policy would be small and change would gradual.

What are some of the possible implications of Yuan revaluation for the Forex market? Yuan revaluation could be a modest positive for JPY and Asian currencies. JPY sometimes is used as a proxy for Yuan revaluation and Yuan revaluation could make Japan and other Asian nation’s exports more competitive. Japan and other Asian nations would likely intervene to try to prevent any significant appreciation of their currencies should China revalue Yuan. Therefore the impact Yuan reevaluation for JPY and Asian currencies could be limited. Yuan revaluation could be a negative for the EUR. China’s reserves rose to a new high of $2.4trln at the end of March. China is the US government’s biggest foreign creditor. China buys US bonds (USD) to help manage its Yuan peg. This contributes to China’s accumulation of USD reserves. China has been diversifying some of its reserve holdings into the EUR and other currencies. Yuan revaluation would reduce China’s need to rebalance reserves into the EUR and other currencies and the USD may benefit. In addition Yuan revaluation makes it cheaper for China to buy US bonds, another positive for the USD. The impact of Yuan revaluation on the commodity currencies is not clear. Yuan revaluation would tighten monetary conditions. Tightening of monetary conditions could slow global growth and demand for commodities. Yuan valuation could also be a boon for commodity demand as stronger the Yuan makes it cheaper for China to buy commodities.

If China wants to become more influential on the global financial stage it will need to lay the foundation for the Yuan to emerge as a global currency. This means Yuan revaluation at some point seems inevitable. China has kept the Yuan pegged at 6.83 per USD since July of 2008. The Yuan peg was used to help China’s exporters weather the global downturn that emerged after the Lehman Brothers crisis. With the worst of the credit crisis passed and China’s growth accelerating Chinese officials should be more willing to consider Yuan revaluation. Yuan revaluation would help China’s economy become more productive and reduce reliance on exports for growth. Despite today’s announcement of the first Chinese trade deficit in six years we expect China will announce a shift in its currency policy in the coming months and let the Yuan gradually appreciate. China is unlikely to announce a major shift in its Yuan policy because it could hurt China’s exporters. China may use the March trade deficit to deflect criticism about its currency policy but the deficit is not likely to derail Yuan revaluation.