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Bankers change calls on prompt yuan revaluation

Some of the most aggressive investment-bank forecasts of a yuan revaluation are being pushed back in the wake of a growing spat over textiles between China and its key trade partners.

Although US Federal Reserve Chairman Alan Greenspan said on Tuesday that he believed China would adopt a more flexible exchange rate system "reasonably soon," bankers are changing their calls on an early revaluation.

Many had previously predicted Beijing would adjust the decade-old yuan peg to the US dollar in the current quarter or earlier, but now they say the row over China's booming textile exports has politicized any decision.

Some skeptical analysts, however, said the banks were simply using the trade row as an excuse to cover-up past misreadings of Chinese policy intentions.

They said Beijing never intended to revalue last month, does not plan to do so for several months to come and that the entire situation was misjudged.

"China was never going to do it," said Julian Jessop, senior international economist at Capital Economics in London. "This is the investment banks looking for an excuse why they were wrong."

Government-linked economists in China also said that the investment bank community misread the tea leaves.

They said any decision to revalue the yuan, which is effectively pegged at 8.28 to the US dollar, will ultimately be made by Premier Wen Jiabao (溫家寶) and a limited group of senior officials who make up the State Council, or Cabinet.

"Foreign investment banks have limited access to senior government officials and to important decisions like the revaluation of the yuan," said Li Ruoyu (李若谷) of the State Information Center.

"Their yuan revaluation forecasts are only their understanding of signals sent out by government officials. They may not be on purpose but, in effect, they mislead market expectations," Li said.

He Fan (何帆), a senior economist at the Chinese Academy of Social Sciences, argued that while the banks may not have any special insight into the matter, they can manage the market's expectations to pile pressure on China to act.

"The government has said many times that it won't bow to pressure and that the yuan would be revalued unexpectedly," he said. "But if the pressure gets big enough, the government may make some kind of modest move."

JP Morgan, which had been among the most aggressive of the forecasters, said last week that if China had moved in May, the current trade frictions could have been averted.

"There could be many excuses to explain why China did not move the [yuan] in May, which could have helped to reduce the risk of a trade war," JP Morgan said.

"However, the rising threat of a trade war could only help to delay the move further. The timing of [yuan] regime change is a more complicated political issue now," the firm said.

Citigroup, which had also expected a move this quarter, told clients this month that "the probability of a near-term move could be lessened by political events."

Global currency markets were on tenterhooks throughout May on expectations that China would adjust the currency peg for the first time since 1997.

Still, some banks are sticking to their forecasts.

Merrill Lynch's currency team in London continues to predict a 10 percent appreciation of the yuan over the next three weeks.

Whatever the timing, the bottom line for most of the analyst community remains that something needs to happen soon.

"If it doesn't happen in the second quarter, it'll happen in the third. We just think economic timing is right but it all comes down to politics and that depends on a whole load of other things," Lehman Brothers economist Rob Subarraman said.
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