Instant View: China keeps yuan flat despite flexibility pledge

SHANGHAI (BestGrowthStock) – China’s central bank set the yuan’s daily mid-point at 6.8275 against the dollar on Monday, unchanged from the mid-point on Friday, after announcing on the weekend that it would allow the yuan to trade more flexibly.

Stock markets, commodities and some Asian currencies had jumped in early trade after the weekend news, but gave back some of their gains on disappointment that the yuan did not rise.

China announced on Saturday that it would resume making the yuan more flexible, signaling that it was ready to break a 23-month-old peg to the dollar that had come under intense international criticism.

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KEY POINTS

– Most analysts believe any appreciation in the yuan will be slow and modest. China said it would “reference” a basket of currencies but did not give further details. On Sunday, the central bank said that exchange rate reform would be gradual, ruling out both major appreciation and a one-off revaluation and suggesting the new currency regime will look a lot like the old one.

– China’s announcement that it was resuming yuan reform seemed calculated to disarm critics of its currency regime before a Group of 20 summit this weekend in Canada. But a top U.S. lawmaker, Senator Charles Schumer, said China must provide more details about its new currency policy or U.S. lawmakers will press ahead with plans to raise trade barriers.

COMMENTARY JOSEPH TAN, ASIAN CHIEF ECONOMIST, CREDIT SUISSE, SINGAPORE

“In terms of the mode of revaluation, we are unlikely to see a one-off revaluation. We don’t expect China to revert back to the appreciation path. The difference is, prior to the 2007-2008 crisis, the currency was gaining 7 to 8 percent per annum versus the U.S. dollar. This time we only expect a maximum 5 percent appreciation over 12 months given the uncertainty that continues to surround the external environment.

“This, of course, will help to mitigate the tensions between the U.S. and China. The timing is quite impeccable. They opted to do it before the G20 meeting.

“You need to see this from the Chinese perspective that it’s part of a bigger package. The currency is just one of the tools in which they use to normalize monetary policy. They have used reserve requirement ratios, they have tried limiting bank credit. As a next step, we actually see the Chinese raising interest rates modestly in the second half of this year. All of these is part of the fine tuning and the normalization of policy.

“In terms of impact on the economy, I don’t think it will have a huge dampening impact because the thrust is to normalize, not to tighten aggressively. We still see growth at about 9.5 percent for this year. Obviously, this will ease inflation.”

SHI CHENYU, ECONOMIST, INVESTMENT BANKING DEPT, ICBC, BEIJING:

“The announcement about yuan reform does not mean an immediate appreciation of the yuan.

“The change will be a wider real trading band. However, China does not need to widen the nominal daily trading band of 0.5 percent either side as the real fluctuations are much smaller than that, but China is likely to make the yuan/dollar rate in the onshore market more volatile.

“The change is likely to happen after the G20 summit in Toronto. China will be under pressure from the U.S. and Europe to let the yuan move more freely.

“The yuan is likely to appreciate in 2010, but the appreciation will be less than 2 percent. That’s a level that is acceptable for both the government and the market.”

ETSUKO YAMASHITA, CHIEF ECONOMIST, SMBC, TOKYO

“Those who had expected the yuan to be set at a higher rate than on Friday were disappointed, leading to a retreat in the euro and other currencies.

“Perhaps the Chinese authorities feared raising the midpoint today would lead to market speculation that the yuan will be raised by the same margin every day for the time being. They probably want to see a more moderate rise in the RMB.”

MITUL KOTECHA, HEAD OF GLOBAL FX STRATEGY, CREDIT AGRICOLE, HONG KONG:

“Saturday’s statement was more of a statement of intent rather than a statement of how much do they propose to do now. Today, for instance, they have maintained their fixing on the yuan at the same rate.

“It’s going to be a softly-softly approach in our view. It is good for risk appetite, it is good for Asian currencies in general. In terms of the broader market impact, it is a bit mixed as markets start to view this as a gradual approach by China. But it is a positive step.

“Today’s fixing has tempered some of the broader market expectations of a one-off revaluation move. However, it doesn’t change our appreciation forecast and we have kept our end-year forecast of 6.73 on the dollar/yuan.”

HU YUEXIAO, CHIEF MACRO ECONOMIST, SHANGHAI SECURITIES, SHANGHAI:

“The yuan’s rise versus the dollar will be gradual this year. If it’s too fast, it will hurt Chinese exports.

“The central bank statement means China is going back to the path of yuan reform between 2005 and 2008.

“Making the yuan more flexible against dollar will enable China to guide the yuan’s real effective rate lower against a basket of currencies, which has been rising since China repegged the yuan against the dollar.”

ENDRE PEDERSEN, FUND MANAGER AT MFC GLOBAL INVESTMENT MANAGEMENT, HONG KONG

“People will be a little puzzled as to why they didn’t allow the move to start today. But they should not look at this like a one-day trade. It’s a multi-month trade. We are not reading too much into this at all.

“Over the next few weeks, we would expect the currency to start making some ground against the dollar. But we are not going to trade anything on one number like that.

HE YIFENG, ANALYST WITH HONTYUAN SECURITIES, BEIJING:

“It’s a clear signal that the central bank wants to cool down sentiment a little bit. The market should not be too optimistic or pessimistic about the future. Appreciation is still around the corner, but it will be modest.

“We expect the yuan/dollar rate will be 6.7 by the end of 2010. In other words, appreciation in next six months will be less than 2 percent.”

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DONG XIAN’AN, CHIEF MACRO ECONOMIST WITH INDUSTRIAL SECURITIES IN BEIJING:

“The rise in the yuan against the dollar will depend on the euro’s trend this year.

“Yuan de-pegging from the dollar is more important than its appreciation.

“The de-pegging will have a significant positive impact on global economy and the prices of commodities and assets.”

ELIZA LIU, ECONOMIST WITH CCB INTERNATIONAL, BEIJING:

“If the euro keeps weakening, the yuan should depreciate against a basket of currencies.

“Even if the euro zone’s debt crisis stabilizes, the yuan’s gain against the dollar will not exceed 2 percent this year.

“Within the next month, the yuan’s rise versus the dollar will be less than 1 percent.”

BACKGROUND

– Beijing has faced a barrage of complaints from abroad for keeping the yuan artificially cheap even as the country’s export juggernaut roared back to life. Some Western economists believe the yuan could be undervalued by as much as 40 percent.

– The strength of China’s economic recovery gave policymakers the confidence to end the peg that had helped cushion the economy from the global financial crisis, but they remain worried that external demand is still not on a solid footing, especially with European debt worries in the background.

Nevertheless, China needs to allow the yuan to rise, even if it is in tiny steps, to prove that it is serious in its commitment to make the currency more flexible. U.S. Treasury Secretary Timothy Geithner stressed that Beijing’s actions would speak louder than words.

– Concern about an overheating economy was the catalyst for Beijing’s landmark yuan reform in July 2005, when the central bank revalued the yuan by 2.1 percent, breaking a decade-long dollar peg. It let the yuan rise by a further 19 percent over the next three years before freezing it in place again in mid-2008 when the financial crisis began to hit Chinese exports.

– Any rally in global financial markets may fade quickly and even reverse if disappointment sets in that China’s reform is not more radical.

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Instant View: China keeps yuan flat despite flexibility pledge