A Yuan That Floats (Almost)?

China to Float Yuan by June 30, Shun One-Off Jump, Survey Shows

April 13 (Bloomberg) -- China may allow the yuan to appreciate by June 30 to curb inflation while avoiding a one- time jump in value that might curb exports, a survey of analysts showed.

Twelve of 19 respondents surveyed by Bloomberg said the central bank will allow the currency to float more freely this quarter, five expect it to happen by Sept. 30, and the rest expect the move by year-end. Eleven see no one-off revaluation, while eight forecast an immediate gain of between 0.5 percent and 5 percent. Fifteen predict a wider daily trading range.

Allowing the currency to strengthen would temper inflation after a 17 percent surge in import prices in March from a year earlier helped cause China’s first trade deficit since 2004. A “slow” appreciation would give manufacturers enough time to adjust their businesses, which slumped during the global recession, according to Oversea-Chinese Banking Corp.

“If it’s just a slow resumption then it’s not going to be too much of a negative shock for exporters,” said Emmanuel Ng, a strategist at the owner of Singapore’s biggest life insurer. “It doesn’t make sense to revert to a one-off move. That would speak volumes against the yuan being more market-driven.”

The trading band will be widened to between 0.75 percent and 3 percent either side of the central bank’s daily reference rate, from 0.5 percent now, the survey showed. The median estimate is for the yuan to strengthen 3.1 percent to 6.62 per dollar by year-end. Estimates ranged from 6.4 yuan to 6.8 yuan in the survey carried out since April 9.

The analysts are more bullish on the currency than traders in the forward market. Nine-month non-deliverable yuan contracts show traders are pricing in a 2.3 percent gain in the currency from the spot rate of 6.8252 as of 8:10 a.m. in Hong Kong.

Support for Exporters

U.S. President Barack Obama met yesterday with Chinese President Hu Jintao and reaffirmed his view that it’s “important” for China to move toward a “more market-oriented exchange rate,” a White House aide said. U.S. lawmakers have urged him to use the threat of trade sanctions to force a policy change. Hu told Obama that a stronger yuan won’t solve U.S. unemployment problems.

Foreign-exchange reserves rose to $2.45 trillion in March, the world’s largest holdings, as the central bank sold its own currency to maintain an almost two-year-old peg of 6.83 per dollar.

Those currency sales have helped fuel inflation and asset- price bubbles. Consumer prices rose 2.7 percent in February from a year earlier, the biggest increase in 16 months.

A stronger yuan will “unambiguously reduce China’s soaring import bill,” said Glenn Maguire, regional head of research at Societe Generale SA in Hong Kong, the most aggressive forecaster of yuan gains. “China is a ‘‘price taker’’ of commodities -- goods sold in global auction markets denominated in dollars.”


After repeated calls for a higher Chinese currency by US officials and staunch resistance by Chinese officials, it appears that the Yuan may be allowed to appreciate.

Will this solve America's trade deficit?

We think not.

The amount of appreciation will likely be small.

So the question we ask is - Why the change of heart among Chinese officials?
It must be more than just concerns about inflation.