Name: Inst 2005-07-31 4:32
http//today.reuters.com/...
China policy fog thick a week after yuan move
Fri Jul 29, 2005 4:17 AM ET
By Alan Wheatley, China Economics Editor
BEIJING (Reuters) - The more things change, the more they stay the same.
A week after China's landmark 2.1 percent revaluation, the yuan is still hugging tight bands around a dollar peg enforced by the central bank, and U.S. senators are warning afresh of trade trouble for Beijing unless it lets the currency rise further.
Although most economists are confident the yuan will indeed edge higher, they said divisions within the government and the deliberately ambiguous nature of China's new foreign exchange regime made it treacherous to predict the pace of change.
"What we are currently in is some sort of unknown halfway house between what we had before and a trade-weighted or a basket-management system. At the moment we have more questions than answers," said Robert Rennie, chief currency strategist at Westpac Bank in Sydney.
In an attempt to provide some clarity, the People's Bank of China (PBOC) called in some top economists last Friday, the day after it abandoned the yuan's 11-year-old dollar peg and replaced it with the following mouthful: a "managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies."
One of those invited, Hong Liang of Goldman Sachs in Hong Kong, said she got the impression from assistant central bank governor Li Gang that the PBOC had been authorized to let the yuan move within a given range but that any appreciation in the first month would be very limited.
"He kept his cards close to his chest," Liang said. "The sense I got out of that meeting is that 2 percent clearly seems to be a compromise. The central bank would have liked to move a little more, but other ministries in the cabinet probably want a more conservative, gradualist approach."
A BIT MORE ROOM
Gradualism is certainly what the markets have got so far. The yuan, also known as the renminbi, has since moved less than 0.04 percent up and down from the rate of 8.11 per dollar to which it was revalued after more than eight years virtually fixed near 8.28.
To be sure, the past week's range is much wider than the span of 8.2763 to 8.2765 that used to prevail on most days beforehand. But the central bank is far from having exploited the 0.3 percent daily margin, up or down, built into the new system.
"The authorities may have shifted to a basket arrangement and added a bit more room for marginal flexibility, but the renminbi exchange rate today is still effectively fixed rather than floating, and it should remain so for a good while to come," says Jonathan Anderson of UBS in Hong Kong.
That would not go down well with U.S. senators Charles Schumer and Lindsey Graham, who on Thursday renewed a threat to press ahead with legislation that would impose a 27.5 percent tax on Chinese imports unless China built on the initial revaluation.
One strand of market speculation is that China will throw a bone to Washington by permitting another appreciation when Congress returns from its summer recess in September, the month that President Hu Jintao visits the United States.
Yet economists said the clear message from the central bank was that domestic imperatives, primarily the fear of job losses, and not international pressure are driving currency policy.
SMART MOVE
According to this thinking, policy makers, banks and firms will be given time to adjust to mini-moves before being exposed to the full blast of market forces and bigger currency swings.
That is why central bank officials stress that the next stage of reform -- which they never tire of saying involves more than just the yuan's rate -- is to introduce more hedging instruments.
Liang at Goldman Sachs expects China within six months to have a much more developed and transparent forward market so firms can hedge their exposure. Over the same period, she added, the central bank is also likely to loosen its grip on the yuan a bit by introducing a system of market makers for spot dollar/yuan.
Even with an emphasis on gradual adjustment, Gregg Gibbs of Royal Bank of Canada in Sydney expects the yuan to rise to 7.8 per dollar by the end of 2005 and 7.4 by the end of next year.
Jean-Christophe Iseux, an adviser on foreign economic cooperation to the ruling Communist Party, expects an appreciation of no more than 5 percent over the next year, roughly what offshore derivatives markets are pricing in.
Yet could even this be too much for China's cautious rulers?
Jim Walker of CLSA said that, with a closed capital account, a managed float like China's is effectively a regime fixed by the diktat of the government and the central bank, not by the market.
"Expect plenty more yuan stability until the PBOC decides otherwise," he said in a note. "No one really knows whether the renminbi will move again soon or whether we will be at 8.11 per dollar in 10 years' time. That is smart central banking."
(Additional reporting by Vidya Ranganathan in Singapore and Mark Bendeich in Kuala Lumpur)
China policy fog thick a week after yuan move
Fri Jul 29, 2005 4:17 AM ET
By Alan Wheatley, China Economics Editor
BEIJING (Reuters) - The more things change, the more they stay the same.
A week after China's landmark 2.1 percent revaluation, the yuan is still hugging tight bands around a dollar peg enforced by the central bank, and U.S. senators are warning afresh of trade trouble for Beijing unless it lets the currency rise further.
Although most economists are confident the yuan will indeed edge higher, they said divisions within the government and the deliberately ambiguous nature of China's new foreign exchange regime made it treacherous to predict the pace of change.
"What we are currently in is some sort of unknown halfway house between what we had before and a trade-weighted or a basket-management system. At the moment we have more questions than answers," said Robert Rennie, chief currency strategist at Westpac Bank in Sydney.
In an attempt to provide some clarity, the People's Bank of China (PBOC) called in some top economists last Friday, the day after it abandoned the yuan's 11-year-old dollar peg and replaced it with the following mouthful: a "managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies."
One of those invited, Hong Liang of Goldman Sachs in Hong Kong, said she got the impression from assistant central bank governor Li Gang that the PBOC had been authorized to let the yuan move within a given range but that any appreciation in the first month would be very limited.
"He kept his cards close to his chest," Liang said. "The sense I got out of that meeting is that 2 percent clearly seems to be a compromise. The central bank would have liked to move a little more, but other ministries in the cabinet probably want a more conservative, gradualist approach."
A BIT MORE ROOM
Gradualism is certainly what the markets have got so far. The yuan, also known as the renminbi, has since moved less than 0.04 percent up and down from the rate of 8.11 per dollar to which it was revalued after more than eight years virtually fixed near 8.28.
To be sure, the past week's range is much wider than the span of 8.2763 to 8.2765 that used to prevail on most days beforehand. But the central bank is far from having exploited the 0.3 percent daily margin, up or down, built into the new system.
"The authorities may have shifted to a basket arrangement and added a bit more room for marginal flexibility, but the renminbi exchange rate today is still effectively fixed rather than floating, and it should remain so for a good while to come," says Jonathan Anderson of UBS in Hong Kong.
That would not go down well with U.S. senators Charles Schumer and Lindsey Graham, who on Thursday renewed a threat to press ahead with legislation that would impose a 27.5 percent tax on Chinese imports unless China built on the initial revaluation.
One strand of market speculation is that China will throw a bone to Washington by permitting another appreciation when Congress returns from its summer recess in September, the month that President Hu Jintao visits the United States.
Yet economists said the clear message from the central bank was that domestic imperatives, primarily the fear of job losses, and not international pressure are driving currency policy.
SMART MOVE
According to this thinking, policy makers, banks and firms will be given time to adjust to mini-moves before being exposed to the full blast of market forces and bigger currency swings.
That is why central bank officials stress that the next stage of reform -- which they never tire of saying involves more than just the yuan's rate -- is to introduce more hedging instruments.
Liang at Goldman Sachs expects China within six months to have a much more developed and transparent forward market so firms can hedge their exposure. Over the same period, she added, the central bank is also likely to loosen its grip on the yuan a bit by introducing a system of market makers for spot dollar/yuan.
Even with an emphasis on gradual adjustment, Gregg Gibbs of Royal Bank of Canada in Sydney expects the yuan to rise to 7.8 per dollar by the end of 2005 and 7.4 by the end of next year.
Jean-Christophe Iseux, an adviser on foreign economic cooperation to the ruling Communist Party, expects an appreciation of no more than 5 percent over the next year, roughly what offshore derivatives markets are pricing in.
Yet could even this be too much for China's cautious rulers?
Jim Walker of CLSA said that, with a closed capital account, a managed float like China's is effectively a regime fixed by the diktat of the government and the central bank, not by the market.
"Expect plenty more yuan stability until the PBOC decides otherwise," he said in a note. "No one really knows whether the renminbi will move again soon or whether we will be at 8.11 per dollar in 10 years' time. That is smart central banking."
(Additional reporting by Vidya Ranganathan in Singapore and Mark Bendeich in Kuala Lumpur)