China's holiday ends with peg still in place

[HenryTo]

Quote of the day: "If you revalue the currency, who stands to gain? It's going to be the speculators," Eldon said [HSBC's Chairman]. "I don't think that it's going to be something that people want to see."

Like I said before, the Renminbi/Dollar carry trade is not a "sure thing" and neither is any speculation out there.
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As China's holiday ends with peg still in place, economists debate yuan

Photo: AFP
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BEIJING, (AFP) - The May Day holiday had nearly passed without any moves on China's currency front despite several confident predictions the authorities would have bitten the bullet and set the yuan free over the week-long break.

Instead, economists remained locked in heated debate as to whether a revaluation was likely or even advisable for a China which now dominates any discussion about the wellbeing and outlook for global economy.

"The best course of action for China is to stick with the peg," Andy Xie, Hong Kong-based economist with Morgan Stanley, said in a research note. "China should change the peg when the conditions are right for China."

China has come under often intense pressure to revalue the yuan, which is fixed in a narrow band at around 8.28 to the dollar, from major trading partners the United States and the European Union who argue that its currency regime gives Chinese exports an unfair advantage.

So far Chinese officials have more or less consistently said that Beijing is preparing for change but it cannot be hurried and no timetable has been set although their remarks have been taken on occasion to support one side or other of the argument.

Xie instead believes that China can actually have its cake and eat it too, arguing that revaluation expectations help the government as it moves ahead with reform by listing key assets and boosting the supply of stocks.

"The revaluation expectation increases demand for Chinese assets and should help China restructure its economy," he said.

Dutch financial services company ING disagrees, saying China is likely to revalue its currency, the yuan, by an initial 10 percent, as it seeks to cool the heat coming from a textile row with the United States and the EU which could lead to limits on its exports.

The firm's research arm said recent moves by the United States and the EU to investigate an upsurge in Chinese textile imports have prompted it to double its prediction of a five-percent widening of the currency band.

The United States and the EU are investigating the sharp rise in Chinese textiles shipments to their markets after the scrapping of global quotas on the industry on January 1 this year and in response to complaints form their local industries and limits could follow.

On this basis, ING said it expects a currency revaluation within the next three months but this is far from a consensus view.

"The warnings of potential trade sanctions by the US are most likely empty threats," said Xie. "Any sanction on Chinese imports would hurt the United States as badly as China, in my view."

He said China-made products retail for about four times as much in the United States as the American businesses pay Chinese producers.

As many as 10 million American workers may be involved in adding value in the China trade and up to 15 percent of the profits of America's largest companies come from marking-up cheap Chinese products, Xie said.

Others too see no reason for change in an arrangement that benefits many.

There is no compelling reason for China to revalue the yuan and a currency adjustment now would only unjustly reward speculators, Hongkong and Shanghai Banking Corp.'s chairman David Eldon said earlier this week.

"A lot of what is going on today in China is about a lot of speculators who are sitting on the wings waiting for there to be a revaluation," Eldon told a news briefing in Singapore.

"If you revalue the currency, who stands to gain? It's going to be the speculators," Eldon said. "I don't think that it's going to be something that people want to see."

Economists said expectations of a change were fueled by People's Bank of China governor Zhou Xiaochuan who said late last month that rising global pressure for a currency adjustment could force a move sooner rather than later.

"Managing market expectations is part of the policy-making process and that's what people in the market take for granted," said a Hong Kong-based economist.

"We listen to Zhou as we do (US Federal Reserve chairman Alan) Greenspan and I'm not 100 percent sure that he realizes that everyone is trying to analyze what he is saying. If I were him, I'd be more careful."