Print

Mail

wiki links

Expectations heap pressure on China

This file photo taken last Friday shows a bank teller counting stacks of Chinese yuan and US dollars at a bank in Shanghai. After months of intense foreign pressure, China on 21 July freed the yuan from an 11-year-old peg to the US dollar in favor of a trade-weighted basket of monies, likely composed of the greenback, euro and yen -- a move broadly seen as a political signal of stability rather than any change of substance in economic fundamentals. PHOTO: AFP

Ten days after China revalued its currency the central bank is again in a tight fix, battling market expectations for further adjustments.

China allowed the yuan to appreciate 2.1 percent to 8.11 yuan to the US dollar and has kept details about the basket's workings a secret, although it has promised to release more details in time.

The small shift, which by most estimates means the yuan is still undervalued by at least 10 percent, has prompted traders to speculate further changes are imminent, with some predicting a fresh adjustment before the end of the year.

In an attempt to undermine speculators China's central bank last Tuesday took the unusual step of posting a notice in English, warning them not to interpret the revaluation last week as the first in a series.

"The 2.1 percent adjustment does not mean that the yuan exchange rate has been appreciated as a first step and that there will be further adjustments," the statement said.

Central bank chief Zhou Xiaochuan (周小川) reiterated the remarks late on Friday and promised to gradually allow the markets to know more details of the new forex mechanism.

Analyst said the announcement reflected the bank's desire to deflect expectations amid worries about short-term funds flooding the banking system, a problem that has plagued the monetary system for the last two years.

"The central bank should manage expectations by controlling the pace of appreciation in the currency," said Ma Jun (馬駿), economist at Deutsche Bank.

It came as little surprise too that the central bank weighed into the forex market to prevent the yuan from rising sharply.

The yuan ended its first week of trade at 8.1056 to the US dollar, about a 0.04 percent change compared to the new level after its nearly decade-long peg to the US dollar at 8.28.

Although China's new managed float can in theory allow for a 0.3 percent shift in either direction to what the market deems fair value, analysts say the central bank is unlikely to allow that sort of play over the short term.

"Clearly it shows how in the earlier rhetoric China intends to do things gradually and in a step-by-step manner," Prakash Sakpal, an economist at ING Barings in Singapore, said of the yuan's minimal fluctuation.

It raises questions too about whether the revaluation is in effect just a new peg, much like the one against the dollar that locked the currency in a narrow band at around 8.28 yuan to the dollar.

China's central bank, which is fighting for greater monetary-policy independence from the ruling Communist Party, was in favor of a greater adjustment to the currency, analysts said.

"But there was a pretty strong view [among other decision makers] for a smaller adjustment," said Fred Hu (胡祖六), economist at Goldman Sachs.

Some say that Beijing's cautious strategy has only emboldened speculators to bet on further appreciation which would almost certainly trigger even more capital flows into China.

"The two percent revaluation has not relieved, and in fact has only intensified, yuan revaluation speculation," Zhang Shuguang (張曙光), a former senior fellow at the Chinese Academy of Social Sciences, told a forum in Beijing last week.

"What else is the central bank going to say in the face of mounting pressure?" Zhang said of the series of statements issued in the course of this week.

If China is to avoid the deluge of hot money that would cost billions of yuan in mop-up fees or spark an inflationary crisis, then it must give in to market demands by at minimum widening the yuan's trading band, Zhang said.

Beijing has long pledged to make its currency freely convertible as it presses ahead with 25 years of market-based reforms that launched its capitalist revolution, but is still hindered by the remnants of its command economy.

Holding it back are worries that its financial system is still too weak to cope with with fluctuations of full-floating currency, while its monetary hedging tools remain under-developed.

"It is a transition period now, and the central bank needs to map out policies to help Chinese enterprises gradually adapt to the fluctuation while giving time to its the banks to complete their reforms," said Sun Lijian (孫立堅), economist from Fudan University.

"A comparatively stable rate of yuan is needed and so there will be more government intervention to maintain a stable rate within the floating scale," Sun said.

But unless China allows further appreciation, Democratic Senator Chuck Schumer and Republican Senator Lindsey Graham said on Friday that they would again push for a congressional vote on their co-sponsored bill that seeks punitive tariffs on all Chinese imports.

China, it seems, is back where it started.
This story has been viewed 1433 times.