Signals point to imminent action on the yuan in Beijing

There have been tantalising signals in recent days that something is afoot with the yuan.

The International Monetary Fund has ratcheted up its campaign for a convertible Chinese currency, saying last week that China should move to flexibility 'without undue delay'. In Beijing, People's Bank of China governor Zhou Xiaochuan this week complained that heavy inflows of capital into the country had fuelled economic overheating, although he stopped short of spelling out the obvious solution - allowing the yuan to appreciate.

Then, United States Finance Undersecretary John Taylor, at the Asia-Pacific Economic Co-operation meeting in Santiago this week, announced that the forum would release a statement - presumably vetted by the Chinese - calling for 'more flexible currency regimes'.

'China is now laying the foundations to that by developing exchanges of information and technical co-operation with the United States and others,' he said.

China can also expect co-ordinated pressure to revalue the currency at the October G7 meeting, which it has been invited to attend.

All this has been accompanied by a flurry of activity on the non-deliverable futures (NDF) market for the Chinese currency. The 12-month yuan NDF rose to an effective 8.03 to US$1 yesterday, compared with the official rate of 8.3 to the dollar, to which it has been pegged since 1994.

The lack of a liquid cross-border yuan bond market, combined with the huge excesses of liquidity in the banking system, makes it increasingly difficult for China to use its traditional blunt policy weapons - such as administrative edicts to curb lending or control prices - to achieve macroeconomic goals.