Get your thinking on the currency right and the rest of the investing matrix is a lot easier to understand.
Sometimes I use visual cues:
China may allow the yuan to trade more freely against the dollar, while avoiding an abrupt revaluation that would wreck its exports, according to Fan Gang, an adviser to the country’s central bank.
“China may resume a managed float of its exchange rate, particularly if the uncertainty of the overall post-crisis economic situation diminishes,” Fan wrote in an opinion piece published today in China Daily, a government-backed English language newspaper. “If the adjustment came abruptly, Chinese companies would suffer a sudden loss of competitiveness.”
Fan echoed People’s Bank of China Governor Zhou Xiaochuan’s comments this month that the nation will “sooner or later” exit its anti-crisis policies, which included pegging the yuan to the dollar since July 2008. Vice commerce minister Zhong Shan said in Washington this week that foreign pressure for China to revalue the yuan won’t succeed, commenting after five U.S. senators proposed legislation last week that would allow action to address exchange-rate “misalignments.”
Twelve-month non-deliverable yuan forwards rose 0.2 percent to 6.6710 per dollar as of 5:30 p.m. in Hong Kong, according to data compiled by Bloomberg. The contracts reflect bets the currency will strengthen 2.3 percent in the coming year from the spot rate of 6.8270. The yuan was allowed to appreciate 21 percent in the three years before the current peg was introduced.
Inflation, Trade Gap
The timing of any shift in currency policy will depend on the pace of inflation and China’s trade surplus, said Hua Ercheng, the Beijing-based chief economist at China Construction Bank Corp., the nation’s second-largest lender.
“The central bank may need to let the exchange rate move first before raising interest rates if inflation quickens and the trade surplus widens again,” said Hua, a former economist at the International Monetary Fund.
Central bank Deputy Governor Zhu Min said yesterday that interest rates are a “heavy-duty weapon” and alternative tools for addressing liquidity are working well, helping to explain why the bank hasn’t raised borrowing costs. Consumer-price gains accelerated to a 2.7 percent pace in February, the fastest in 16 months.
Fan’s office said he was traveling and unavailable to comment on his reported remarks.
The Treasury Department will decide next month whether to label China as manipulating its currency, a designation not invoked since 1994. Chinese Premier Wen Jiabao said three days later that the yuan was not undervalued and policy makers aim to keep the currency “basically stable.”
The threat of protectionism is boosting the likelihood that the yuan will resume gains this half, according to Michael Buchanan, a Hong Kong-based economist at Goldman Sachs Group Inc. He predicts a 5 percent strengthening this year.
“Our baseline view remains that the appreciation will occur in the second half of 2010, but the risks of a slightly earlier move are growing,” Buchanan wrote in a note dated yesterday. “It is never practical to pre-announce a change in a fixed exchange rate regime, given the incentive for capital flows.”>>>MORE