Yuan by munificent Blog entry

Blog: Spirit of Money, Financial Fluidity
by munificent

Yuan

Cheap Chinese Stuff.....Interesting their valuation of 2.1% appreciation. Me thinks once we have taught the Chinese the game, they will beat us at it...Time and Time again

Date: 7/27/2005 7:50:39 AM ( 19 y ) ... viewed 1272 times

China Says It Does Not Plan More Revaluation

By DAVID BARBOZA and JONATHAN FUERBRINGER
Published: July 27, 2005
BEIJING, July 26 - Just days after China modestly revalued its currency and did away with its longstanding peg to the American dollar alone, the nation's central bank issued a statement Tuesday denying that there were any plans for further revaluation of the currency.

The People's Bank of China released the statement in what appeared to be an effort to quell widespread speculation that over the next year China would allow its currency, the yuan or renminbi, to further appreciate against the dollar.

The statement blamed "certain foreign media" for creating the impression that the 2.1 percent revaluation announced last Thursday would lead to more revaluations soon.

Analysts said that the announcement may have been aimed at stopping a potential flood of capital into China trying to capitalize on any rise in the value of the yuan. Such a sudden inflow of capital would force China's central bank to take extra steps to keep the yuan from rising further against the dollar.

"When the rhetoric became extreme about further moves, they felt they had to come out with a statement," said Robert Sinche, global head of currency strategy at Bank of America. "We believe they are through for this year," he added, referring to any further revaluations.

The new rate posted by China's central bank just after the 2.1 percent revaluation last week was 8.11 yuan to the dollar. The value published by China's central bank Tuesday was 8.1099 yuan to the dollar.

Mr. Sinche said that he did not expect as much of a revaluation over the next 12 months as some other analysts. He is predicting a revaluation of 2.7 percent over the next year, to 7.9 yuan to the dollar. Based on trading in one-year contracts, the currency market is predicting a revaluation of 4.6 percent, to 7.75 yuan to the dollar.

Many analysts said after the Thursday revaluation and decoupling from the dollar that there were so few details about the new foreign exchange regime that it was hard to tell what was going to happen. John B. Taylor, former under secretary for international affairs at the Treasury Department, said Tuesday's announcement was not a disappointment. "Rather than have a band, they're having a band on the change," he said. "The notion of leaning against the wind, which is used in thinking about exchange rates, is making a statement about the change not being too big."

The dollar rallied against the Japanese yen after Tuesday's announcement and now has mostly rebounded from the 2.6 percent drop that occurred just after Thursday's announcement. The dollar fell last week on the belief that the yen would appreciate along with the yuan. In trading on Tuesday, the dollar was worth 112.35 yen, up 0.8 percent from Monday. The dollar was 0.2 percent higher against the euro, with the euro valued at $1.207.

The Treasury market was little changed after Tuesday's announcement. It sold off after China's revaluation last week because investors feared that a rise in the value of the yuan over time would mean that China would be investing less in the Treasury market in an effort to keep the value of the yuan from rising against the dollar. Many analysts argue that China's investments have kept interest rates lower than they otherwise would have been.

In its statement Tuesday, the central bank said that a revaluation of the yuan against the dollar last Thursday by about 2 percent "does not imply an initial move which warrants further actions in the future."

The central bank also said the "reform of the RMB exchange rate regime must be proceeded in a gradual way," referring to the renminbi. The statement went on, "The reform is focused not on the quantitative adjustment of the RMB exchange rate but on the improvement of the RMB exchange regime."

Many of Wall Street's leading economists and currency specialists have said in the last few days that they believe China's decision to decouple its currency and allow the yuan to appreciate against the dollar was an initial step in a gradual process that could put China's currency gain anywhere from 5 percent to 12 percent against the old dollar peg over the next year.

They said, however, that the modest appreciation would not appease critics who have long argued that China's currency is undervalued.

Senator Charles E. Schumer, Democrat of New York and co-sponsor of a bill that would threaten China with steep tariffs on its exports if it did not significantly change its currency policy, said that "while the Chinese Central Bank has said that they will not do another fixed valuation in the near future, we trust that the Chinese will allow market forces to work. We will be carefully monitoring this process over the next few months."

Some economists estimate that the yuan is 15 to 30 percent undervalued and that over the next year China will use its new "managed float" system, tied in part to a basket of foreign currencies, to allow the yuan to continue to appreciate modestly.

But economists warn that allowing its currency to appreciate against the dollar could lead to other problems in China. Some fear that it could begin to hinder China's booming export trade, possibly causing job losses and an economic downturn.

David Barboza reported from Beijing for this article and Jonathan Fuerbringer from New York.