Tuesday, December 25, 2007

Well, rumors of a one-off revaluation keep coming, despite having been shown wrong repeatedly. Look, the pace of revaluation will be faster next year, but can you imagine the Chinese government raising prices on Chinese exporters by 10% over-night? It is simply not going to happen. There is only one caveat. If inflation rises above 10% and nothing else seems to work to stem inflation, the central government may do this out of desperation. For now, however, there is yet little limit to increasing reserve requirements and in issuing sterilization bonds. It's a hassle for the PBOC, and that's why we keep hearing "rumors" from them.

South China Morning Post
Regulators seek 'one-off' yuan appreciation
Al Guo in Beijing
Updated on Dec 25, 2007
Mainland monetary regulators have reportedly asked the State Council for a "one-off" appreciation of the yuan, a move that could signal a tough new policy to reduce rising global trade tensions and fight excessive liquidity.

The plan, reported in a state-owned newspaper yesterday, would mean an abrupt policy change by officials who have long argued for a gradual gain of the yuan against the US dollar and other currencies.

But with China facing growing demands from its key trading partners for a strong yuan, Beijing is under increasing pressure to widen the currency's trading band and for one-off steps to accelerate revaluation.

Although the yuan has risen by more than 10 per cent since Beijing's decision in July 2005 to scrap its peg to the US dollar, there has been no visible impact on the mainland's surging trade surplus.

The Shenzhen-based Securities Times quoted an unidentified person with "the authorities" as saying that the People's Bank of China had submitted a proposal to allow a faster appreciation of the yuan next year.

The proposal had been worked out by high-ranking officials from the central bank, the State Administration of Foreign Exchange and the Ministry of Commerce.

The yuan was trading at 7.3556 yuan to the dollar yesterday, a gain of 10.26 per cent since July 2005. It has surged more than 6 per cent this year.

Officials from the PBOC and SAFE contacted yesterday said they had not heard of the proposal and declined to make further comment.

"Faster appreciation is likely given growing inflation and liquidity problems domestically and increasing external pressures from the US and Europe," said Yiping Huang, the managing director and head of Asia-Pacific economics at Citigroup.

He expects a 7.5 per cent appreciation of the yuan against the dollar next year, with growing consensus among policymakers to more effectively use the exchange rate to fight overheating risks.

Gao Zhanjun, an executive manager at Citic Securities, said a big change in the yuan would be out of character for Beijing as it had repeatedly emphasised a gradual pace of appreciation. "The problem is how fast is fast enough," he said. "A slow pace at least offers administrators the room to make adjustments according to market changes."

"A one-off appreciation is unlikely," said Alan Luk Ting-lung, a treasurer at American Express Bank.

The central bank, battered by excessive liquidity, believes a stronger yuan could help ease money supply and curb inflation. The Ministry of Commerce fears a stronger yuan would dent the country's exports.

Tsinghua University professor Zhang Taowei said the administration did not have the courage to abandon its policy of gradual appreciation. "It's all about governing styles," he said. "If former premier Zhu Rongji was still in charge, I think a change was possible. But this administration has been living with compromises."

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