I Get By With Alittle Help From My Friends....

Dinar Outcast


You are not connected. Please login or register

Q+A-Why is the yuan rising faster all of a sudden?

View previous topic View next topic Go down  Message [Page 1 of 1]

littlekracker


Q+A-Why is the yuan rising faster all of a sudden?

Published September 21, 2010

By Alan Wheatley and Simon Rabinovitch

BEIJING, Sept 21 (Reuters) - China's yuan has risen 1.35percent in the past nine trading days, quickening its rate ofclimb against a backdrop of growing U.S. criticism of China'sexchange rate policy.

The People's Bank of China, which tightly manages thecurrency, let the yuan rise on Tuesday as high as 6.6987 perdollar -- above 6.70 for the first time since Beijingunshackled the currency from a decade-old peg to the dollar in2005.

Following are the answers to some questions raised by therecent rise in the yuan, also called the renminbi.

WHY IS CHINA LETTING THE YUAN RISE MORE QUICKLY?

-- The best guess -- and when it comes to policy moves inChina, it can be only a guess -- is that Beijing is respondingto both economic fundamentals and political considerations.

For a related analysis, click on

-- In a series of five articles in July setting out thePBOC's thinking about the yuan, deputy central bank governor HuXiaolian emphasised the importance of the trade surplus as adeterminant of the exchange rate. The surplus has averaged $22billion a month since May, strengthening the hand of the PBOCand other advocates of faster appreciation in their internaldebates with opponents led by the commerce ministry.

SURELY EXTERNAL POLITICS ARE A DECISIVE INFLUENCE?

-- Beijing insists that the yuan is a sovereign issue thatit alone will decide.

"But in reality it has been making some concessions. Ittakes very seriously the pressure from the United States overthe renminbi exchange rate," said Sun Zhe, a professor atTsinghua University in Beijing who specialises in China-U.S.relations.

Sun said Congress was unlikely to pass legislationpunishing China for holding down the yuan before a visit byPresident Hu Jintao, which diplomats say is pencilled in forJanuary.

But U.S. pressure could nonetheless force Chinesepolicymakers to think more seriously about whether a strongeryuan was in the country's self-interest, the professor said.

Xu Biao, an economist with China Merchants Bank inShenzhen, said the yuan might rise more strongly than expectedin light of criticism on Monday from President Barack Obama.

"The fresh comments from Obama are likely to putunprecedented pressure on the yuan to rise as Japan and Europemay follow Washington," Xu said.

-- Sun said it was important to bear in mind that China isalso feeling the heat from developing economies such as Braziland India. "This pressure is coming from many countries andChina has to respond before the G20 summit," he said.

The next G20 summit is in Seoul on Nov. 11-12. It was nocoincidence that China announced an end to the yuan's23-month-old de facto peg to the dollar on June 19, just a weekbefore the previous G20 summit in Toronto, where it earnedplaudits for its move.

IS THIS TIME DIFFERENT?

-- The yuan's appreciation versus the dollar has beenunquestionably fast over the past 9 days, prompting traders todescribe it as a mini-revaluation. It is the longest string ofgains since a landmark revaluation in July 2005, when theyuan's 11-year formal peg to the dollar was broken.

-- But it is not entirely without precedent. China let theyuan rise at about the same pace in early 2008, when it wastrying to tame soaring inflation.

-- China could push the yuan up to 6.6 against the dollarin coming weeks, traders say, which would mark a nearly 3percent rise since early September, reflecting the intensity ofU.S. pressure. See

-- The risk for China is that it will invite unwantedhot-money inflows if it makes a habit of allowing the yuan toappreciate ahead of important political dates.

A key question, then, is whether the PBOC makes good on itspromise to introduce more volatility into the exchange rate sothat speculators do not view the yuan as a one-way bet. Itwould not be surprising to see the currency fall back at leastsomewhat against the dollar after this burst of appreciation.

HOW MUCH HAS THE YUAN ACTUALLY GAINED?

-- When the PBOC said three months ago that it wouldincrease exchange rate flexibility, many observers believedthat it would finally fulfill its pledge to manage the yuanagainst a basket of currencies.

-- On that count, the yuan's gains over the past two weeksseem far less impressive. In July and August, while inching upagainst the dollar, the yuan actually fell 2.8 percent againsta trade-weighted basket of currencies, according tocalculations by the Bank for International Settlements.

-- The yuan's performance against the euro has been evenmore dismal. The Chinese currency is down 3.6 percent againstthe euro since its June de-pegging. Even during the yuan'smini-revaluation against the dollar, it has continued to fallversus the euro, because the euro itself has been even strongeragainst the U.S. currency. For related story, see

-- However Beijing manages the yuan, one thing is certain:it will not appreciate against the dollar for at least eight ofthe next 12 trading days. Chinese markets are closed forMid-Autumn Festival and National Day holidays, giving the yuan-- and policymakers -- a breather.

WHAT ELSE IS CHINA DOING?

-- Politically, the yuan's nominal exchange rate is an easytarget for critics to latch on to.

Economically, what determines competitiveness is the real,or inflation-adjusted, effective exchange rate against a basketof currencies of a country's trading partners.

The yuan's real effective exchange rate has risen 19percent since 2005; its nominal effective exchange rate is up14 percent over the same period.

China is gently engineering a degree of real appreciationby increasing the cost of manufacturing in China.

After a pause during the global financial crisis, wages areagain rising at an annual pace of about 15 percent to 20percent. Rebates on exports of dozens of commodities have beenscrapped.. And on-grid power tariffs are expected to rise nextmonth (Additional reporting by Chris Buckley and Zhou Xin; Editingby Ken Wills)

View previous topic View next topic Back to top  Message [Page 1 of 1]

Permissions in this forum:
You cannot reply to topics in this forum