Thu, May 12, 2005 page1

• Mistaken report on yuan causes chaos

  • AP
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  The central bank said yesterday it had no new information on the exchange rate for the Chinese yuan after regional markets reacted to a report on the Web site of the Communist Party newspaper People's Daily that fed speculation a revaluation would happen soon.

  Major currencies were roiled briefly, with the Japanese yen soaring against the dollar, the euro and the UK pound, though the report, a translation of an article published in Hong Kong on May 7, was later removed from the Web site.

  Expectations for the yuan's future value surged briefly to record levels in the non-deliverable forwards market, a barometer of future expectations that does not affect the currency's actual value.

  A spokesman for the People's Bank of China, the central bank, said the material did not originate from the central bank.

  The writer of the article that caused all the commotion, a Hong Kong-based journalist working for the China News Service, told Dow Jones Newswires that she was merely discussing the impact of a possible revaluation on Hong Kong, not reporting any change in Chinese policy.

  China strictly limits trading in the yuan and has kept its value pegged at about 8.28 per US dollar for more than a decade.

  A government report yesterday said China's exports would contract sharply if the value of the Chinese yuan rose -- the latest apparent signal that Beijing is not about to make any major changes in its currency policy.

  Export growth would slow to below 10 percent, down from more than 34 percent last year, even if the yuan appreciates by only 3 percent to 5 percent, said the report by Zhai Zhihong, a senior official at the National Bureau of Statistics.

  If the yuan's value were allowed to rise by up to 15 percent, as some have speculated, China's exports could "contract by a rather large amount," Zhai wrote in the report, viewed on the bureau's Web site yesterday.

  Regional foreign exchange markets often are jolted by rumors Beijing might bend to complaints from the US and other trading partners and allow the yuan to trade more freely. US manufacturers contend the yuan is undervalued by as much as 40 percent, giving the country a competitive advantage over US companies.

  Although they are moving ahead with limited foreign exchange reforms, Chinese officials have resisted pressure to revalue the yuan, arguing that the economy and financial system need to be protected from major currency fluctuations.

  Exports are a main driver of China's economic boom -- annual economic growth has been above 9 percent for two years running -- and the country relies heavily on export-oriented investment to build up China's industrial sector and generate jobs for its millions of unemployed.

  Exports grew 35.4 percent year-on-year last year and have continued to rise at about that rate this year. However, higher costs for oil and other materials, transportation bottlenecks, protectionist moves and slower growth among the major global economies may soften demand for Chinese goods this year, the report said.

  China recorded a US$32 billion trade surplus last year, the highest in six years.

  Without a major change in the yuan's value this year, China's exports would grow at between 10 and 15 percent, while imports would increase between 5 percent and 10 percent, resulting in an overall trade surplus of about US$65 billion, Zhai forecast.

  China's trade surplus with the US hit a record US$162 billion last year, the biggest US deficit with any country ever.

  The report contends that a significant appreciation in the yuan's value could produce the opposite of the effect that Washington wants.

  Speculators who have shifted funds to China expecting a revaluation might take profits, selling off their assets in China and sending money back offshore.

  "That could cause a sudden depreciation of the yuan, upsetting the balance of the export sector," the report said.
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