Goldman Sachs stands by prediction on yuan, rates

Goldman Sachs & Co yesterday restated its prediction that China will hike interest rates and revalue its currency in the near term.

"Our view is that the Chinese yuan will experience a shift sometime in the first half of next year, as early as in the first quarter," said Sun Bae-kim, the Hong Kong-based director of Asian economic research for Goldman Sachs (Asia), at a media briefing yesterday.

According to the investment bank's original forecast, the yuan will trade at 8.07 against the US dollar in three months' time from the current 8.28 to the dollar, and then at 7.99 in six months' time.

Goldman Sachs says Chinese expectations of a yuan revaluation have intensified and an internal consensus favoring a more flexible currency arrangement has formed. Without a revaluation, the required tightening of the money supply and interest rates would be much larger, particularly if the US dollar weakens further.

Goldman Sachs yesterday was optimistic about China's interest-rate hike, saying it would be "better late than never."

"The rate move is more a part of a broad switch effort toward market-based monetary policy management and away from administrative controls rather than an additional new tightening measure," its report said.

Goldman Sachs said that it expects the Bank of China to raise rates further next year, but at a more measured pace, with cumulative tightening likely to reach between 100 and 150 basis points.

In late October, China raised interest rates for the first time in nine years, lifting benchmark interest rates by 0.27 percentage points to 5.58 percent for one-year lending and 2.5 percent for deposits.

Meanwhile, China is approaching the right moment for reforming its fixed exchange-rate system, a leading economist was quoted as saying in the official central bank's newspaper yesterday.

"The cost of not adjusting the exchange-rate system is growing," said Ba Shusong (巴曙松), deputy head of the financial institute of the National Development Research Center, in an interview with the Financial News.

"The time for reform of the exchange-rate system is now gradually maturing," he said.

Song Guoqing (宋國青), a professor at the China Center for Economic Research at Peking University, said he believed the time was right for an appreciation of the currency.

"Conditions for the appreciation of the yuan are already mature," Song said in an interview with the 21st Century Business Herald.

Song said there was no evidence to support the view that an appreciation of the yuan would result in the outflow of tens of billions of dollars as currency speculators cash in their gains.

"The investment return in China is still relatively high," Song said.

China has been under pressure from the international community, especially major trading partners such as the US and Japan, to revalue the yuan.

Chinese Premier Wen Jiabao (溫家寶) has said China would not revalue the yuan under duress.

"Honestly speaking, the more speculation there is ... the more unlikely it is that the necessary measures can be undertaken," Wen said.