China may alter yuan-dollar peg

[HenryTo]

Strange to hear such talk considering that the official line is that there won't be a revaluation of the Renminbi any time this year - although analysts are only calling for a widening of the trading band here. I still think this is very unlikely, as history has shown that incrementalism really does not work, especially with so many hedge/hot funds out there nowadays.
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Original article at: http://www.marketwatch.com/news/print_story.asp?print=1&guid={A0143221-A481-47A2-8ACD-8CC05746755A}&siteid=mktw

China may alter yuan-dollar peg
Holiday seen as possible timing for currency reform

By Greg Robb, MarketWatch
Last Update: 5:23 PM ET April 29, 2005


WASHINGTON (MarketWatch) -- Economists reading the tea leaves say there is a chance China will revalue its currency when its financial markets are closed for the "golden week" holiday from May 2 to 6.

But such a move, if it comes, is expected to be minor and therefore won't have severe repercussions for U.S. financial markets, according to Mohamed El-Erian, head of Pimco's emerging markets group.

"They are really close" to a currency move, said Robert Brusca, chief economist at FAO Economics, of the Chinese. "It could happen real soon -- even this weekend."

The talk of revaluation was fueled by a report in the China Securities Journal, which said that the country had now established the conditions to shift from its fixed exchange rate.

Chinese officials have said they intend to move to a more market-based exchange rate, but insist that this would occur only after essential financial and economic reforms are implemented.

As the speculation mounted Friday that the time had finally come for Beijing to do what Washington has been pressuring it to do, a senior official at the Chinese central bank threw cold water on the rumors.

"We have not received any circular to prepare" for a revaluation over the weeklong holiday, an unnamed central bank official told XFN-Asia.

A revaluation works best when it's completely unexpected, leaving speculators no time to rush for the exits.

The timing

Traditionally, governments like to revalue their currencies over weekends or holidays to give themselves the chance to spin the change.

Right now, China's yuan is pegged at 8.28 to the dollar. Critics, especially U.S. manufacturers, have said the rate offers Chinese exporters a significant competitive advantage.

Analysts don't expect a "big bang" announcement from Beijing. For instance, China will probably not allow its currency to "float," letting the market set its exchange rate.

Instead, analysts expect China to try to engineer a small move -- for instance, slightly widening the range in which the yuan can trade by as much as 2%.

"We're not sure about the exact timing, but we believe they are going to move to a wider band," said Pimco's El-Erian. "This would be an important signal, but the economic effects are not going to be major."

Speculation that China would revalue its currency has increased since the Group of Seven meeting on April 16. At the meeting, most leaders of G-7 countries, except the Japanese delegation, put pressure on China to move on its currency.

U.S. Treasury Secretary John Snow has said repeatedly in recent weeks that China has met the conditions for currency reform. His remarks were echoed by Federal Reserve Chairman Alan Greenspan and by President Bush.

A move by China would be designed, in part, to stem the rising tide of protectionism in the United States, analysts said. Sen. Charles Schumer, D-N.Y., has pushed legislation that would slap a 27.5% tariff on Chinese exports because of its fixed currency.

Incrementalism

Analysts disagreed about the wisdom of taking such a small step.

Brusca said the move would simply increase speculative currency inflows into China. "A small move won't make anybody happy. It will then create all kinds of problems for [China], because once they've made the currency flexible, you are going to see more speculation against it," he added.

But El-Erian said a bigger move would be a "lose-lose scenario" for the U.S. economy, because it might disrupt bilateral financial flows.

China has been buying U.S. Treasurys to maintain its dollar peg.. And that has kept U.S. interest rates low.

Any disruption in these flows would raise interest rates, which could hurt the U.S. housing market and consumers.

"We expect the damage to the bond market to be moderate and short-lived," said Joe Abate and John Llewellyn, top economists for Lehman Bros., arguing that the Chinese would still have to buy Treasurys to maintain the new peg.

Andrew Busch, global foreign exchange strategist for Harris Nesbitt/BMO Financial Group, said any move by China would boost Asian currencies against the dollar, but that it would be short-lived.

Overall, analysts cautioned that moving China to a more flexible exchange rate is no easy task.

"With the exception of Poland, there has been no smooth exiting from a fixed-exchange rate regime," El-Erian said.

"This," he added, "is not an easy thing to do."

Greg Robb is a senior reporter for MarketWatch in Washington.

[HenryTo]

Looks like Snow is relaxing his stance on re-evaluation a bit - saying he is still "encouraged" but emphasized that it will be a "sovereign decision" that only China can make:
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Saturday June 4, 3:27 AM
U.S.'s Snow still believes China will move on yuan
WASHINGTON, June 3 (Reuters) - U.S. Treasury Secretary John Snow, speaking one week before he meets with his Chinese counterpart in London, said on Friday that he believed Beijing would relax its controlled currency regime.

In interviews on U.S. television, Snow also played down fears over weaker-than-expected May jobs numbers and indicated no concern at surging house prices, which some fear warn of a property bubble. Markets are used to Snow making such calming remarks, but always pay close attention when China crops up.

"I'm encouraged we're on the right path," Snow said in an interview with Bloomberg Television. He had been asked if he expected a move from Beijing over its currency regime, which keeps the yuan low against the dollar to boost exports.

"I'm confident they will do it, but I can't put a clock on it," he said. Snow last week said that he expected a move in the next six months.

Finance ministers from China, India, Brazil and South Africa and will meet with counterparts from the Group of Seven rich nations and Russia in London on June 10-11.

The G7 includes Britain, France, Italy, Canada, Japan, Germany and the United States.

China is under intense U.S. pressure to ease its strict yuan peg. But Snow was careful to note that this would be a "sovereign decision" that belonged to Beijing alone.

He also repeated the U.S. view that a move toward more currency flexibility would be good for both China and the global economy, and again called for a "meaningful" move.

Asked whether a 3 percent to 5 percent widening in the yuan's trading band would satisfy that requirement, Snow said: "In our private conversations with them, we're talking about what that might constitute but it's better to keep those conversations private." The yuan is currently pegged between 8.2760 and 8.2800 per dollar.

HOT HOUSING

In separate remarks to Fox News Channel, Snow said he was not concerned by rising U.S. house prices in some areas, which have fueled fears of a property bubble and prompted the Federal Reserve to term some housing markets as "frothy".

Instead, he saw these as reflecting market forces, although Snow also predicted the hottest sectors may steady.

"Housing prices are rising in some places like Las Vegas. But that is because demand is high. I think it essentially reflects demand and supply conditions in those markets.

"I would expect, though, that we would see some leveling off of prices in those markets that have been unusually hot."

Prices in Nevada jumped over 20 percent in the first three months of the year compared with the final quarter of 2004. Nationally, U.S. house prices grew 12.5 percent in the first quarter from a year ago.

Snow brushed aside concerns over data from the Labor Department that showed 78,000 jobs were created in the United States last month, less than half of what had been forecast.

"We're continuing to have a good recovery in the United States. It's the 24th straight month of pickup," he told Fox.

"These numbers bounce around from month to month. But we're creating jobs at just under 200,000 a month. I think that's going to continue, a 180,000-185,000 a month (pace) on average. And we're on a good, strong course to see that continue."

Asked about the impact of oil prices, Snow said the rising cost of energy was not welcome but would not derail growth.

"The American economy's performing well and I think the high energy prices are one thing that are causing some consternation, some anxiety, with the typical American household, and understandably," he said.

[HenryTo]

No revaluation just yet. One thing Chinese officials has always worried about is the "hot money" that is flowing into the Renminbi anticipating a revaluation of the currency. My guess is that they will want to see that abating before they will move - although the danger is that the buildup may actually increase from here if they delay this any longer. Situation is getting very precarious here.
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Official: China Reforms to Remain Gradual
Friday May 27, 8:09 am ET
By Elaine Kurtenbach, AP Business Writer
Chinese Officials Give No Indication That Beijing Will Accelerate Moves to Revalue Its Currency


SHANGHAI, China (AP) -- Officials gave no indication Friday that Beijing would accelerate moves to revalue the Chinese yuan, as regional currency traders shrugged off a prediction by U.S. Treasury Secretary John Snow that China would take such action within six months.

Speaking to a conference in Seoul, South Korea, China's central bank governor, Zhou Xiaochuan, said reforms would remain gradual.

"We should go further to reform, but respect economic stability," Zhou said, citing the economy's strong reliance on exports for growth. He added that "timing is important for the government to resolve problems."

Zhou did not refer directly to the controversy over its controls on the yuan, which Beijing has kept at a rate of about 8.28 yuan per U.S. dollar since 1994. U.S. officials are pushing for a revaluation, arguing that the yuan is undervalued, giving Chinese exporters an unfair price advantage.

Snow told a U.S. Senate Banking Committee hearing on Thursday that "China is now ready and should move without delay" on adopting a more flexible currency system.

He has warned that if Beijing doesn't take bolder action on the yuan by the time the U.S. government issues its next semiannual report to Congress on China's currency policies, it will be designated as a currency manipulator.

"I fully anticipate that before our return, before we conclude the next report, we will have seen the sort of action that we are calling for," Snow said. But he acknowledged, "I may have to eat those words in six months."

Officials at the central bank said Friday that they had no comment on Snow's remarks. The Foreign Ministry and ministries of commerce and finance referred questions to the central bank.

In a quarterly report issued Thursday, the central bank, the People's Bank of China, said it expected to maintain basic stability for the yuan's exchange rate.

Top Chinese officials have repeatedly said that strong foreign pressure would not sway their handling of foreign exchange reforms. They have pledged to eventually let the yuan trade more freely, but say the country's banks and economy must be shielded from strong currency fluctuations.

Regional currency markets, which often swing wildly on yuan-related speculation, showed little reaction Friday to Snow's comments.

Dealers said they were more concerned about China's stance, since Beijing will decide its own foreign exchange policies.

[HenryTo]

Somehow, I don't think this is going to work and it may blow up in everyone's faces. When this happens, I definitely do not want to be long anything.
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US tells China: Revalue yuan by 10%

Report: US tells China to revalue yuan to head off protectionist legislation in Congress.

May 23, 2005: 11:07 PM EDT

TOKYO (Dow Jones) - The U.S. Treasury has told China that it must revalue its currency by at least 10% against the dollar to prevent protectionist legislation in the U.S. congress, the Financial Times reported in its international edition Tuesday.

Henry Kissinger, former U.S. secretary of state, is one of a number of unofficial envoys who have impressed upon China the urgent need for action, on the 10% target and on the seriousness of the threat from Congress, people familiar with the administration's efforts told the FT.

As well as the minimum 10% target revaluation, Kissinger was briefed by the Treasury on the need for other measures, such as a shift to a currency band against the dollar or a basket against a number of currencies to replace the peg.

Bill Rhodes, senior vice chairman of Citigroup Inc. (Research) , and Brent Scowcroft, national security adviser to former U.S. President Gerald Ford and former President George H. W. Bush, have also acted as unofficial envoys on behalf of the administration, the FT said.

Rhodes declined to comment on talks with Beijing but said: "Apart from any external pressure, I think it's in China's interests in the coming months to move towards a market interest rate regime, accelerate the opening of the capital accounts, and move to a more flexible exchange rate system," according to the FT.

Tony Fratto, U.S. Treasury spokesman, refused to comment on the 10% minimum target. "We have made it clear that the interim step should be of sufficient magnitude and flexibility to quell speculative financial flows," he said, according to the FT.

On the missions of Kissinger and others who have spoken to Beijing, Fratto said: "Without commenting on particular individuals, I would say it is important for the Chinese authorities to hear from respected individuals who can provide an accurate analysis of the American political environment."

[HenryTo]

Sorry speculators - no Renminbi revaluation as of now. There is no such thing as a free lunch anyway.
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China vice-premier: no yuan schedule
Conditions, not pressure, to determine timing -report

By MarketWatch
Last Update: 2:31 AM ET May 23, 2005

TOKYO (MarketWatch) - Chinese Vice Premier Wu Yi said the country has no timetable for lifting the dollar-peg on its yuan currency and will not do so unless conditions are right, according to a published report Monday.

"As for when we will conduct the yuan rate reform, there is no timetable," Wu told a forum in Tokyo, AFX-Asia reported. "If the conditions are right, we will conduct reform voluntarily, even without pressure from foreign countries."

"If the conditions are not right, we will not carry out the reforms, no matter how much pressure foreign countries exert," she said. "In a word, we will abide by market rules, but we will not succumb to external pressure."

China's trading partners are increasing the heat on the country to loosen its yuan peg which effectively keeps the Chinese currency at 8.28 against the dollar. Critics charge the undervalued yuan gives Chinese exports a competitive price advantage.

Wu's comments were in line with those of other Chinese officials, including Premier Wen Jiabao, who made similar remarks last week to a U.S. trade delegation to China.

Wu acknowledged the general need for reform of the currency as the Chinese economy develops and said China had the technical means in place to revalue the yuan.

"Frankly speaking, the yuan fluctuation band has become tighter since 1997," said Wu, referring to the time of the Asian financial crisis.

"As the economy develops, however, we must conduct yuan rate reform for sure."

"We are now in preparation for the yuan rate reform. We need to have a good economic environment as well as good conditions in order to carry out such reform," she told the forum, which was hosted by the Nihon Keizai Shimbun newspaper.

The process of reforming the yuan "must be placed under strict supervision and management," she said.