Analysts’ view: U.S. delays China currency ruling

SINGAPORE (BestGrowthStock) – Treasury Secretary Timothy Geithner said at the weekend that he was delaying a report on whether China manipulates its currency ahead of a visit by Chinese President Hu Jintao to Washington.

The move will allow the two countries to keep tensions over currency in check during Hu’s April 12-13 visit. The Treasury report was due on April 15.

Here are some analysts’ views on the delay:

QING WANG, GREATER CHINA ECONOMIST, MORGAN STANLEY, HONG KONG:

“By highlighting the ‘next three months’, Secretary Geithner is giving China another three months (April to June) to form a consensus and make a decision on the renminbi exchange rate, and this effectively sets July as a deadline for such a move.

“This is consistent with our long-standing call on the timing of a policy move on this front. Moreover, China’s exit from the renminbi peg against the USD during the summer would allow: a) the Obama administration to claim credit of “their skillful diplomacy” in the run up to the mid-term election in November; and b) the Chinese authorities to demonstrate its ‘global responsibility’ in the run up to the G20 Summit that is to take place in Seoul in November.”

GOLDMAN SACHS ECONOMISTS, RESEARCH NOTE:

“Overall, the likelihood of a relatively small move in the CNY has risen further. While we still think a large revaluation remains very unlikely, this is an important step in the adjustment of the exchange rate over time and an important positive development toward sustainable domestic demand growth in China. We fully anticipated such a move when adding new Top Trade last week, long Chinese equities.

“With regards to other currencies, we see two main transmission channels. First, other heavily managed currencies in the region would have more scope to appreciate. Second, the reduced tension between China and the U.S. likely alleviates protectionist fears and hence should offer some support to currencies, which are positively correlated to broader risk sentiment.”

The economists also believe the U.S. Treasury’s decision whether to label China a “currency manipulator” could be pushed back to late June, giving China time to act on the yuan.

AKIYOSHI TAKUMORI, CHIEF ECONOMIST, SUMITOMO MITSUI ASSET MANAGEMENT, TOKYO:

“The United States has effectively left it up to China to decide whether to undo the yuan peg and by how much it would revalue the yuan, and this approach is likely to make China more at ease about reforming its currency regime.

“China sooner or later will need to reform its currency regime because of accumulating trade imbalances, although it is hard to predict the exact timing.

“But Beijing is unlikely to allow a sharp revaluation for fear of hurting the domestic economy and also public sentiment as an already big divide between the country’s rich and poor may widen.”

PARK YOUNG-JOON, HEAD OF INTERNATIONAL MACROECONOMICS, KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY, SEOUL

“The fact that (the announcement) is being delayed indicates the two sides have been talking to each other to avoid a catastrophic situation.

“I expect China will appreciate the yuan by between 3 percent and 5 percent per year ahead of May talks (with the United States) or ahead of the June G20 summit meeting.

“When it allows the appreciation, China will likely emphasize that the move is aimed at boosting domestic demand and not necessarily due to pressures from the U.S.”

MARK WILLIAMS AND JULIAN JESSOP, ECONOMISTS, CAPITAL ECONOMICS, LONDON:

“Beijing might now make some small reform as a gesture of goodwill sooner rather than later. The most likely option would be a widening of the band within which the renminbi is allowed to trade against the dollar. This would at least help to meet U.S. demands for more flexibility, if not necessarily those for more appreciation.

“The upshot is that, while a wider trading band might prepare the way for further reform, it may not divert attention for long from what is likely to be a slow pace of movement once appreciation against the dollar does restart. There still appears to be little appetite in Beijing for the large step revaluation that many in the U.S. demand (and some have predicting for as early as this month).

“Overall, the immediate threat of a U.S.-China trade war may have been averted, and the chances of some modest reform of China’s currency regime in the coming weeks have increased. But there is still a high risk that Beijing’s response ultimately disappoints and the Treasury has only delayed the inevitable.”

Investing Analysis

(Reporting by Rie Ishiguro in TOKYO, Kevin Plumberg in HONG KONG, Yoo Choonsik in SEOUL; Editing by Jan Dahinten)

Analysts’ view: U.S. delays China currency ruling