Revaluation of yuan a gradual process
The widely anticipated move by mainland authorities to revalue the yuan, viewed as the next step towards the liberalisation of China's currency, is likely to be a gradual process, according to financial experts.
Qu Hongbin, HSBC co-head of Asian economics research, says the mainland's management and readjustment of the yuan was taking a similar route it used prior to the financial crisis. The decision to revert to a basket of currencies, including the US dollar, rather than the dollar alone to set the exchange rate, restores policies similar to those in place before the global downturn.
Qu says this would allow the yuan to respond more naturally to supply and demand forces. 'Since the announcement was made we have seen increased volatility and flexibility, I expect this will set the tone going forward. Greater flexibility will allow more scope for latitude in China's monetary policies and could help the authorities to counter inflation,' Qu says.
He says it is important not to confuse the liberalisation of the currency with the opening up of the mainland market. 'Opening the market will continue to be a measured process of gradually becoming more internationalised and more market driven,' Qu says.
Standard Chartered economist Kelvin Lau Kin-heng says the pace of change in the mainland's financial markets over the past 18 months had been significant. 'We have seen international trade settlement grow from nothing to US$50 billion, RMB bonds expansion, readjustment of the RMB and the window open for Hong Kong to develop more RMB products,' Lau says.
The mainland is serious about internationalising the yuan, but this will involve a process of gradual openness. The government's gradual approach to currency flexibility has exceeded expectations. 'We have seen more volatility and movement than we expected. At the current rate, the RMB would appreciate by an annualised rate of 14 per cent over the next 12 months, but we do not expect Beijing to allow this to happen,' Lau says.
He says the trend is likely to be more appreciation. 'We could see the mainland authorities focus on flexibility and volatility rather than allowing outright appreciation. We expect to see ups and downs, yet the trend will be upwards. Over the year, we are expecting to see 3 to 4 per cent appreciation.'
Charles Han, head of Asia-Pacific foreign exchange trading at Newedge Group, anticipates the yuan will continue to appreciate in line with the strengthening of the mainland's economy. Like many industry watchers, Keith Pogson, managing partner, financial services, Far East, at Ernst & Young, expects any further adjustment to the yuan to be gradual.
'Globally, I do not think investors are keen to see a lot of volatility. A smooth, consistent movement in the right direction would be viewed as more useful for international trade and more reassuring for the public,' Pogson says.
He says further revaluation will likely provide benefits for long-term trade, but in the short-term, the mainland will be keeping a close watch on its reserves.
'With about 70 per cent of its reserves held in US dollars, even a gradual appreciation can causes a significant change in value,' Pogson says. He also shares the view that allowing greater flexibility suits the mainland's own needs. 'Apart from helping the Beijing authorities to fight inflation, it could encourage manufacturers to improve efficiency and reduce the country's reliance on exports as a driver for growth.'