April 10. 2010 China may be ready to revalue yuan under US pressure
China appears to be responding to heated criticism from the US and other major trading partners that its currency is undervalued, but any change by the world’s export powerhouse could be felt in the Gulf.
Speculation has increased that China will allow its currency to rise after talks between the Chinese vice premier Wang Qishan and the US Treasury secretary, Timothy Geithner.
The New York Times has said that sources suggested a consensus had been reached for a revaluation of the yuan and that a new currency policy could be announced before Hu Jintao, the Chinese president, travels to Washington for a nuclear security summit that starts on Monday.
According to the paper, Beijing would allow a “small but immediate” revaluation and thereafter allow the currency to trade within a broader daily band, as a way of curbing domestic inflation.
China appears to be responding to heated criticism from the US and other major trading partners that its currency is undervalued, but any change by the world’s export powerhouse could be felt in the Gulf.
Speculation has increased that China will allow its currency to rise after talks between the Chinese vice premier Wang Qishan and the US Treasury secretary, Timothy Geithner.
The New York Times has said that sources suggested a consensus had been reached for a revaluation of the yuan and that a new currency policy could be announced before Hu Jintao, the Chinese president, travels to Washington for a nuclear security summit that starts on Monday.
According to the paper, Beijing would allow a “small but immediate” revaluation and thereafter allow the currency to trade within a broader daily band, as a way of curbing domestic inflation.
Such a move could have implications for other currencies pegged to the dollar, including those in the Gulf.
The yuan has been held at close to 6.83 to the dollar for nearly two years, something that has aroused anger among US politicians and manufacturers who insist they are facing unfair competition from China which keeps the value of its currency too low against those of its rivals.
The reaction within China to repeated calls for an appreciation of the yuan has been equally forthright, with commentators accusing the US of “China-bashing” and scapegoating the country for the economic problems of the United States.
However, a recent decision by the US Treasury to delay the release of a report that could brand China a currency manipulator, which would lead to heavy duties being imposed on Chinese goods entering the US, indicated that both sides were keen to find a resolution without allowing the issue to escalate. Mr Geithner met Mr Wang for 75 minutes during a stopover in Beijing on Thursday.
Many analysts had earlier suggested that China would allow an appreciation of between 3 and 5 per cent in the second half of this year, although some have said Chinese manufacturers could face a more difficult climate in the period, making it harder for Beijing to allow an appreciation.
Ben Simpfendorfer, the chief China economist at the Royal Bank of Scotland, said he expected an initial appreciation of the yuan of about 2 per cent, followed by a further gradual strengthening. He predicted that the initial rise would take place “in weeks rather than days”.
Analysts have suggested that if the Chinese currency was depegged from the dollar, it would increase speculation that other pegged currencies, including those of the Gulf, would follow suit. However, the more likely scenario for the moment is a widening of the allowable daily trading range, rather than an outright decoupling.
Still, if China did eventually decouple from the dollar, there would be “an expectation” that Gulf countries such as the UAE would follow suit, according to Mr Simpfendorfer.
The yuan has been held at close to 6.83 to the dollar for nearly two years, something that has aroused anger among US politicians and manufacturers who insist they are facing unfair competition from China which keeps the value of its currency too low against those of its rivals.
The reaction within China to repeated calls for an appreciation of the yuan has been equally forthright, with commentators accusing the US of “China-bashing” and scapegoating the country for the economic problems of the United States.
However, a recent decision by the US Treasury to delay the release of a report that could brand China a currency manipulator, which would lead to heavy duties being imposed on Chinese goods entering the US, indicated that both sides were keen to find a resolution without allowing the issue to escalate. Mr Geithner met Mr Wang for 75 minutes during a stopover in Beijing on Thursday.
Many analysts had earlier suggested that China would allow an appreciation of between 3 and 5 per cent in the second half of this year, although some have said Chinese manufacturers could face a more difficult climate in the period, making it harder for Beijing to allow an appreciation.
Ben Simpfendorfer, the chief China economist at the Royal Bank of Scotland, said he expected an initial appreciation of the yuan of about 2 per cent, followed by a further gradual strengthening. He predicted that the initial rise would take place “in weeks rather than days”.
Analysts have suggested that if the Chinese currency was depegged from the dollar, it would increase speculation that other pegged currencies, including those of the Gulf, would follow suit. However, the more likely scenario for the moment is a widening of the allowable daily trading range, rather than an outright decoupling.
Still, if China did eventually decouple from the dollar, there would be “an expectation” that Gulf countries such as the UAE would follow suit, according to Mr Simpfendorfer.
But others say that with oil priced in dollars, there is a compelling reason for oil-producing countries’ currency to be linked to the dollar.
For decades China has linked the value of the yuan to the US dollar. In 2005 the link was broken, only to be reinstated in July 2008, by which time the yuan had risen by 20 per cent against the dollar.
