China seen letting yuan gain faster on dollar
Exchange rate to fall below 8 to a dollar in new appreciation strategy, experts say
Beijing will allow the yuan to appreciate faster against the US dollar after the May Day holiday, as the authorities seek to cool the roaring economy and bring down a rebounding trade surplus, according to economists.
A more aggressive appreciation strategy that would see the currency fall below the symbolic eight yuan per dollar mark in coming weeks, was likely because of 'increased worries about what everyone is now calling an overheated economy again', Standard Chartered economist Stephen Green said yesterday. 'Appreciating the exchange rate has a cooling effect.'
In the first quarter, China's economy grew 10.2 per cent and the trade surplus - which tripled to US$102 billion last year - rose 41 per cent, leading Beijing to again rein in lending and overinvestment.
Before President Hu Jintao's visit to Washington last month, the yuan was allowed to appreciate at its fastest rate since the one-off 2.1 per cent revaluation in July last year, and move to a managed basket of currencies.
But for most of the past month, the central bank appeared to have reinstated a virtual peg to the dollar, intervening heavily in the market to keep the currency in a narrow band of between 8.01 and 8.02 yuan to the greenback.
The stalled appreciation was partly to prepare for last week's surprise lending interest rate rise and partly because the central bank wants to wait and see what US policy reaction will be following Mr Hu's visit.
The US Treasury will issue a foreign currency report next week that could label China a 'currency manipulator', but most analysts expect it will refrain from doing so.
UBS economist Jonathan Anderson said Beijing could even be considering another one-off revaluation of up to 5 per cent because of the strengthening trend of other Asian units and stronger macroeconomic pressures at home.
'The one thing that can kill it all is a political problem - if the Treasury does decide to pull the trigger and call China a currency manipulator, or if we get Congress sanctions, the likely response from Beijing will be to hunker down and not move the currency at all,' he said.
Economists believe another one-off revaluation is unlikely due to the damage it would do to the mainland's manufacturing export sector and to the credibility of the new exchange rate regime.
'By the end of the year, we should see the yuan at 7.80 or 7.85 [to the dollar], but an appreciation of 3 per cent in a day or a week is impossible,' said BNP Paribas chief China economist Chen Xingdong.
A level near 7.75 yuan to the US dollar would align the yuan with the Hong Kong dollar, something ING economist Tim Condon believes Beijing is aiming for.
'The one country-one currency concept will exert something of an anchor for expectations about where the yuan should be,' he said. 'I think the endgame is the Hong Kong dollar becoming like the Macau pataca - it just becomes a relic as people stop using it in favour of the more liquid yuan.'
A merger of the yuan and Hong Kong dollar is unlikely in the next 10 years as the yuan will probably not be freely convertible before then.
