Business | Markets
China expected to let value of yuan rise
The US has backed away from naming China as a currency manipulator, while rhetoric from Chinese officials suggests that Beijing is seriously considering allowing the renminbi's appreciation
- Financial Times
- Published: 00:00 April 15, 2010
- Image Credit: Bloomberg
- A clerk at a branch of the Bank of China Ltd. counts 100-yuan notes in Beijing. China is expected to relax its stance on currency value.
Expectations that China could move to let the yuan rise have escalated in recent days amid a thawing in Sino-US relations.
The US has backed away from naming China as a currency manipulator, while rhetoric from Chinese officials suggests that Beijing is seriously considering allowing the renminbi's appreciation.
Speculation has reached such a level that analysts are not just considering the potential effect on other Asian currencies, but also the wider consequences for currency markets as a whole.
A renewed appreciation of the yuan — it rose more than 20 per cent against the dollar between August 2005 and July 2008 — would almost certainly lead to a strengthening of other Asian currencies outside of Japan.
"A stronger yuan is likely to mean that the region's authorities tolerate more FX appreciation than has already been accommodated over the past year," says Fiona Lake, at Goldman Sachs.
Thus countries in the region, such as South Korea, Malaysia and Taiwan, whose exports compete with those from China, will be less averse to appreciation in their own currencies.
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This could send the Malaysian ringgit, South Korean won and Taiwan dollar up sharply through the multi-month highs they hit against the dollar last week as speculation of a move by China to strengthen the yuan intensified.
Most analysts also expect the yen to strengthen after a Chinese revaluation.
This is not just because of the increased competitiveness of the Japanese currency globally but also because of Japan's position as a major exporter into China.
"It is reasonable to suppose that those economies most dependent on China as an export market should benefit [from a yuan revaluation]," says Gareth Berry at UBS.
This theory should also support commodity-linked currencies such as the Australian and New Zealand dollars, as enhanced Chinese purchasing power increases demand for raw materials from both countries.
Some analysts warn, however, that a revaluation of the yuan could be interpreted as negative for risky assets such as commodity-linked currencies, if it is viewed as part of a wider tightening of Chinese monetary policy that could have a dampening effect on domestic growth and risk appetite more broadly.
David Forrester, at Barclays Capital, suggests that such a scenario should not just weigh on commodity-linked currencies, but also boost haven demand for the yen.
Biggest loser
"If yuan revaluation happens, our ranking suggests that the Australian dollar will be the biggest loser and the yen the biggest winner," he says.
Away from commodity-linked currencies, the potential effects on other major currencies seem less than certain.
Todd Elmer, at Citigroup, says speculation of reduced recycling of dollar reserves by Asian central banks could limit gains in the euro.
In order to stem the strength in their currencies, Asian central banks have repeatedly intervened in the currency markets to buy dollars in recent years.
This has resulted in a massive build-up of dollar foreign exchange reserves, with China sitting on the biggest stockpile of $2,447 billion.
In order to rebalance the proportions of different currencies in their stockpiles, reserve managers have diversified a portion of those dollar reserves to buy principally euros, although also other currencies such as sterling.
"The shift out of the dollar and into the euro and other currencies is often cited as a key factor behind the long-term downtrend in the dollar," indicates Elmer.
"If China is less vigorously defending its exchange rate, it will accumulate reserves at a slower pace and this implies reduced buying of the euro to diversify."
Simon Derrick, at Bank of New York Mellon, however, says the extent to which the dollar or the euro benefit from reserve accumulation or diversification will depend on the type of currency reform China introduces.
If Beijing simply reverts to the system it adopted between August 2005 and July 2008 of allowing a gradual appreciation of the yuan, then China could potentially attract huge speculative inflows betting on a steady rise in the currency, he says.
Thus a gradual revaluation of the yuan will further boost dollar FX reserves and increase China's need to diversify into other currencies such as the euro, weighing on the US currency.
"The only way the dollar will benefit from a currency regime change is if China announces a large one-off revaluation of the yuan which douses speculative inflows into China," says Derrick. "This seems increasingly unlikely."
Given that he expects a gradual appreciation in the yuan, Derrick says moves in major currencies are likely to be more influenced by other factors such as Greece's fiscal problems and the prospects for US growth.
Indeed, Ms Lake, at Goldman Sachs, says given the limited renminbi appreciation she expects, its impact may not be big enough to influence the trend of major currencies since other offsetting forces are likely to dominate the currency market.
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