Published February 24, 2010
Revaluation of yuan hangs in the balance
Move is expected amid official efforts to fend off asset bubbles, say analysts
By OH BOON PING
REPORTER
WILL China do it or won't it?
Talk of a one-off revaluation of the yuan has captured headlines, with some analysts saying that the move is expected amid official efforts to fend off asset bubbles.
Already, Beijing has begun to clamp down on excessive credit to cool the property and stock markets. And some see a one-off revaluation as a logical next step, especially given inflationary pressure and a nascent recovery in exports.
'I expect a one-time jump in the yuan's value in a few months, followed by gradual appreciation,' says Adam Reynolds, co-head of Societe Generale's flow fixed-income and forex team in Asia.
Already, offshore yuan forwards have priced in 2.7 per cent appreciation against the US dollar over the next year, while a Reuters poll last month centred on a 3 per cent rise by the end of this year.
However, Ben Simpfendorfer, an analyst with Royal Bank of Scotland, reckons gradualism is likely to remain the rule, simply because of the practical challenges of a one-off revaluation.
'The yuan is popularly viewed as undervalued by between 10 and 30 per cent,' he wrote in a report. 'A one-off revaluation less than this might simply attract further capital inflows.'
The magnitude of revaluation is also a challenge.
Talk of a 5 per cent revaluation is popular, but this presents its own set of challenges.
The first is that most Chinese exporters invoice in US dollars, but many do not receive payment until three to six months after delivery and are not hedged against their exposure. Therefore, a sizeable revaluation would hurt the sector's already weak profitability.
Second, according to Mr Simpfendorfer, officials want real appreciation, not just nominal appreciation.
'The faster the currency rises, the more difficult it is to lift minimum wages, raise pollution charges, or liberalise energy markets without damaging the export sector's competitiveness,' he says. 'Yet, all of these reforms are a necessary part of economic rebalancing.'
Just this week, China's Industry Minister Li Dishing said that the export situation 'remains tough'. And earlier, a Commerce Ministry official said that China must ensure the basic stability of the yuan and 'not bow before external pressures'.
Meanwhile, the US dollar extended its downward trend against other major currencies in early trading yesterday.
As of 3.28pm, it traded at multi-day lows of 1.3673 against the euro, 90.9 against the yen, 1.073 against the franc and 1.5576 against the pound.
Following Reserve Bank of Australia deputy governor Ric Battellino's speech at 3pm Singapore time yesterday, the Aussie gained against its most major counterparts. At 3.25pm, it traded near a four-week high of 0.9049 against the greenback and a five-day high of 0.9410 against the Canadian dollar. It was 1.2855 against the New Zealand dollar, 1.5112 per euro and 82.25 against the yen.
During early dealing yesterday, the euro jumped against the US dollar. As at 3.34pm, the euro-greenback pair traded at a six-day high of 1.3675, compared with Monday's close of 1.3601.
Meanwhile, spot gold trended up to trade at US$1118.4 an ounce by 4.53pm Singapore time.
The yellow metal rallied to its strongest level in a month at US$1,130.65 an ounce on Monday before profit-taking kicked in. It has rebounded from a three-month low as investors seek safety from currency volatility, but it is struggling to sustain recent gains.
Looking ahead, markets continue to await news of a possible aid package for Greece. And US Federal Reserve governor Ben Bernanke's semi-annual testimony to the House today will be closely watched.
Markets are also on the lookout for a possible Greek bond issue to gauge market reaction.
Revaluation of yuan hangs in the balance
Move is expected amid official efforts to fend off asset bubbles, say analysts
By OH BOON PING
REPORTER
WILL China do it or won't it?
Talk of a one-off revaluation of the yuan has captured headlines, with some analysts saying that the move is expected amid official efforts to fend off asset bubbles.
Already, Beijing has begun to clamp down on excessive credit to cool the property and stock markets. And some see a one-off revaluation as a logical next step, especially given inflationary pressure and a nascent recovery in exports.
'I expect a one-time jump in the yuan's value in a few months, followed by gradual appreciation,' says Adam Reynolds, co-head of Societe Generale's flow fixed-income and forex team in Asia.
Already, offshore yuan forwards have priced in 2.7 per cent appreciation against the US dollar over the next year, while a Reuters poll last month centred on a 3 per cent rise by the end of this year.
However, Ben Simpfendorfer, an analyst with Royal Bank of Scotland, reckons gradualism is likely to remain the rule, simply because of the practical challenges of a one-off revaluation.
'The yuan is popularly viewed as undervalued by between 10 and 30 per cent,' he wrote in a report. 'A one-off revaluation less than this might simply attract further capital inflows.'
The magnitude of revaluation is also a challenge.
Talk of a 5 per cent revaluation is popular, but this presents its own set of challenges.
The first is that most Chinese exporters invoice in US dollars, but many do not receive payment until three to six months after delivery and are not hedged against their exposure. Therefore, a sizeable revaluation would hurt the sector's already weak profitability.
Second, according to Mr Simpfendorfer, officials want real appreciation, not just nominal appreciation.
'The faster the currency rises, the more difficult it is to lift minimum wages, raise pollution charges, or liberalise energy markets without damaging the export sector's competitiveness,' he says. 'Yet, all of these reforms are a necessary part of economic rebalancing.'
Just this week, China's Industry Minister Li Dishing said that the export situation 'remains tough'. And earlier, a Commerce Ministry official said that China must ensure the basic stability of the yuan and 'not bow before external pressures'.
Meanwhile, the US dollar extended its downward trend against other major currencies in early trading yesterday.
As of 3.28pm, it traded at multi-day lows of 1.3673 against the euro, 90.9 against the yen, 1.073 against the franc and 1.5576 against the pound.
Following Reserve Bank of Australia deputy governor Ric Battellino's speech at 3pm Singapore time yesterday, the Aussie gained against its most major counterparts. At 3.25pm, it traded near a four-week high of 0.9049 against the greenback and a five-day high of 0.9410 against the Canadian dollar. It was 1.2855 against the New Zealand dollar, 1.5112 per euro and 82.25 against the yen.
During early dealing yesterday, the euro jumped against the US dollar. As at 3.34pm, the euro-greenback pair traded at a six-day high of 1.3675, compared with Monday's close of 1.3601.
Meanwhile, spot gold trended up to trade at US$1118.4 an ounce by 4.53pm Singapore time.
The yellow metal rallied to its strongest level in a month at US$1,130.65 an ounce on Monday before profit-taking kicked in. It has rebounded from a three-month low as investors seek safety from currency volatility, but it is struggling to sustain recent gains.
Looking ahead, markets continue to await news of a possible aid package for Greece. And US Federal Reserve governor Ben Bernanke's semi-annual testimony to the House today will be closely watched.
Markets are also on the lookout for a possible Greek bond issue to gauge market reaction.