Excerpt from February article 2nd art. below ~
"But if Beijing wants to reap all the rewards coming from such a move, including cheaper imports, an end to international pressure for currency reform, and a petering out of hot money inflows, then the one-off revaluation will need to be of a sufficient magnitude to convince everyone that the yuan won’t be due for another hike in the not-so-distant future. A 5% appreciation is likely too small to do anything more than stimulate speculation over when the next hike is due".
June 20, 2010
China signals end to dollar peg
Beijng vows yuan flexibility ahead of G20 but rules out one-off revaluation
Beijing: China will gradually make the yuan's exchange rate more flexible, the central bank in Beijing said yesterday a week before a G20 summit, strongly suggesting that it was ready to break the currency's 23-month-old dollar peg.
However, it all but ruled out a one-off revaluation or major appreciation, saying there was "no basis for big fluctuations or changes" in the exchange rate.
The dollar peg has come under intense fire from abroad as China's export juggernaut roared back to life, while much of the rest of the global economy remained sluggish and beset by unemployment in the wake of the financial crisis.
Just ahead of a G20 summit in Canada, the announcement seemed to be intended to placate critics of China's currency regime.
US President Barack Obama welcomed China's announcement. "China's decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy," Obama said in a statement later Saturday.
Positive gesture
"We believe this is a positive gesture, suggesting the yuan will soon resume its appreciation against the dollar," Goldman Sachs economists Yu Song and Helen Qiao said.
The news could soothe investor fears of a trade row between the US and China at a delicate time for the world economy and propel world stock markets higher tomorrow.
It was clear that China intended its announcement to mark the end of the yuan's de facto peg to the dollar, which it had defended as a "special policy" to protect its economy from the global financial crisis.
"The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with enhanced economic stability," the Chinese central bank said in a statement.
Dominique Strauss-Kahn, head of the International Monetary Fund, also saluted the announcement, saying it would boost Chinese household incomes and domestic investment, key ingredients for rebalancing the global economy.
In practice, it is likely to mean that the central bank will use its system of setting daily reference rates for the yuan to guide the currency back to a path of gradual appreciation against the dollar, which it followed for three years until mid-2008.
Initial movements in the yuan's exchange rate will probably be small, but cumulatively, it could amount to several percentage points of accumulation over the next few months, several analysts said.
The "crisis-mode" of locking the yuan to the dollar was over, but any appreciation would likely be slow and modest, said Li Daokui, an academic adviser to the People's Bank of China, the central bank.
http://gulfnews.com/business/economy/china-signals-end-to-dollar-peg-1.643468
China signals end to dollar peg
Beijng vows yuan flexibility ahead of G20 but rules out one-off revaluation
Beijing: China will gradually make the yuan's exchange rate more flexible, the central bank in Beijing said yesterday a week before a G20 summit, strongly suggesting that it was ready to break the currency's 23-month-old dollar peg.
However, it all but ruled out a one-off revaluation or major appreciation, saying there was "no basis for big fluctuations or changes" in the exchange rate.
The dollar peg has come under intense fire from abroad as China's export juggernaut roared back to life, while much of the rest of the global economy remained sluggish and beset by unemployment in the wake of the financial crisis.
Just ahead of a G20 summit in Canada, the announcement seemed to be intended to placate critics of China's currency regime.
US President Barack Obama welcomed China's announcement. "China's decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy," Obama said in a statement later Saturday.
Positive gesture
"We believe this is a positive gesture, suggesting the yuan will soon resume its appreciation against the dollar," Goldman Sachs economists Yu Song and Helen Qiao said.
The news could soothe investor fears of a trade row between the US and China at a delicate time for the world economy and propel world stock markets higher tomorrow.
It was clear that China intended its announcement to mark the end of the yuan's de facto peg to the dollar, which it had defended as a "special policy" to protect its economy from the global financial crisis.
"The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with enhanced economic stability," the Chinese central bank said in a statement.
Dominique Strauss-Kahn, head of the International Monetary Fund, also saluted the announcement, saying it would boost Chinese household incomes and domestic investment, key ingredients for rebalancing the global economy.
In practice, it is likely to mean that the central bank will use its system of setting daily reference rates for the yuan to guide the currency back to a path of gradual appreciation against the dollar, which it followed for three years until mid-2008.
Initial movements in the yuan's exchange rate will probably be small, but cumulatively, it could amount to several percentage points of accumulation over the next few months, several analysts said.
The "crisis-mode" of locking the yuan to the dollar was over, but any appreciation would likely be slow and modest, said Li Daokui, an academic adviser to the People's Bank of China, the central bank.
http://gulfnews.com/business/economy/china-signals-end-to-dollar-peg-1.643468
February 15, 2010
Take Two for a One-Off Revaluation?
Almost four years ago China’s Premier Wen Jiabao said the yuan would never again undergo a one-off revaluation.
Bloomberg News Further “one-off administrative moves to increase or decrease” the yuan’s value “won’t occur. There won’t be any more surprises,” he told a press conference after the close of the annual meeting of the legislature in 2006.
Now, faced with rising inflation and the need to rein in fast-paced economic growth, might the unimaginable be on the cards again?
Goldman Sachs chief economist Jim O’Neill thinks he sees it coming. He told Bloomberg News Friday that he thinks Beijing may be ready to allow the yuan to rise by as much as 5% in a one-time revaluation.
“I have a strong opinion that they’re close to moving the exchange rate,” he told Bloomberg. “Something’s brewing. It could happen anytime.”
He made the comments Friday after the People’s Bank of China ordered commercial banks to increase their reserve holdings, an economic cooling measure that came much earlier than most market watchers had anticipated.
The yuan’s first revaluation was on July 21, 2005, when Beijing lifted the value of the currency 2.1% against the U.S. dollar and did away with its peg to the dollar, instead “referencing” the yuan to a basket of currencies. In practice, Beijing instituted a crawling peg to the dollar, allowing the yuan to gradually strengthen against the buck over the following three years.
But starting in mid-2008 with the onset of the financial crisis, the yuan’s progress was put on ice with the currency maintaining a de facto peg to the U.S. dollar ever since.
While markets broadly expect the yuan to resume appreciating at some point – China continues to post large trade surpluses and add to its foreign exchange reserves, both typically seen as key indicators of a currency being undervalued – it’s hardly a foregone conclusion that Beijing will take the same approach as last time.
During the peak of the yuan’s appreciation in late 2007 and early 2008 – the currency rose about 7% against the dollar in both years – China became a target for speculative capital as investors bet that the yuan would be worth more in the months ahead. Those funds were blamed for helping fuel bubbles in both the equity and real-estate markets. Moreover, inflation continued to rise despite the stronger currency, making it difficult for the technocrats to argue the macroeconomic merits of appreciation.
So even if Beijing decides that the time has come to do away with the dollar peg, it may not be wedded to again making the yuan a one-way bet for speculators.
O’Neill is not the first to raise the prospect of a one-off revaluation.
“There’s a very urgent need” for pushing forward changes to the exchange rate, and “now is the best time,” said Zhang Bin, a research fellow at the Institute of World Economic and Politics under the Chinese Academy of Social Science early in January. Zhang said a 10% one-off appreciation of the yuan against the dollar “would have limited impact on China’s macroeconomy” and could deter inflows of speculative capital betting on future currency gains.
Other economists argue that after a revaluation, Beijing should then implement a similar currency regime to that of Singapore and allow the yuan to trade in a narrow band against a trade-weighted basket of currencies.
But if Beijing wants to reap all the rewards coming from such a move, including cheaper imports, an end to international pressure for currency reform, and a petering out of hot money inflows, then the one-off revaluation will need to be of a sufficient magnitude to convince everyone that the yuan won’t be due for another hike in the not-so-distant future. A 5% appreciation is likely too small to do anything more than stimulate speculation over when the next hike is due.
http://blogs.wsj.com/chinarealtime/2010/02/15/take-two-for-a-one-off-revaluation/tab/print/
