Page 1 of 2 SUN WUKONG 'Devalue' call undermines yuan true faith
By Wu Zhong, China Editor
HONG KONG - Until last week, it had been a general belief among financial
investors and speculators that the Chinese currency, the yuan, would continue
to appreciate particularly against the US dollar at least for the next couple
of years. That faith is being undermined by market talk that the Chinese
government might reverse its course of the past two years and deliberately
devalue the currency.
The heretical talk started with the publication of a paper by Tan Yaling, a
senior analyst with Bank of China (BOC) on May 6. The
fast appreciation of the yuan was now beyond the country's "bearability", Tan
said, and was becoming harmful to the short-term stability and long-term
development of the economy. She said the government should consider taking a
"one-step" measure to significantly devalue the yuan at "an appropriate time"
so as to disillusion the market's expectations of a continuous appreciation of
the currency.
State-controlled BOC is the country's major foreign currency bank Tan's report
was for this reason immediately read as an official message that the government
was testing the waters before doing something to curb yuan appreciation. Tan's
argument appeared in particular to be echoing concerns recently publicly
expressed by senior financial officials such as central bank governor Zhou
Xiaochuan, about inflows of speculative money betting on further yuan
appreciation.
The stock markets on the mainland and in Hong Kong reacted promptly. On May 7,
Hong Kong's benchmark Hang Seng Index dropped 2.48% to close at 25,610. Share
prices of leading Hong Kong-listed mainland enterprises shed more than the
average. The benchmark Shanghai Composite index plunged 4.13% to close at
3,579. The markets remained weak in the remaining days of last week.
The yuan, whose rate of appreciation had slowed in previous days, reversed
direction on May 8, with the official exchange rate down 162 basis points to
7.0010 yuan to one US dollar. This was the third-largest one-day decline since
July, 2005 when China changed its fixed exchange regime to allow the gradual
revaluation of the yuan by linking it to a basket of hard currencies instead of
the US dollar alone. The yuan previously traded at about 8.3 to one US dollar.
The two largest single-day drops were on April 14 and 15, 2006, when the yuan
shed 200 and 225 basic points respectively. In off-shore trading, the one-year
non-delivery forward (NDF) rate dropped 1.24% to 6.6040, compared with 6.2 at
the end of March.
BOC waited two days after Tan's report before issuing a clarification, with BOC
spokesman Wang Zhaowen saying in Beijing on May 8 that "the research only
presents the personal view of Tan Yaling, which does not represent the view of
Bank of China."
He could have well added, "Even if it is the BOC view, it does not represent
the Chinese government." For, although still controlled by the state, BOC is in
fact pretty much a commercial bank.
Certainly, the Chinese government could intervene in the market and change the
exchange rate of the yuan at any time, since it still holds tight control. But
there are ample reasons to believe that Beijing would not take this course,
although it did take a big devaluation 14 years ago in different circumstances.
The yuan has gained 18% since the mid-2005 reform and 4% this year.
Peng Xiangdong, deputy general manager of the Agricultural Bank of China's
international business department, told reporters: "BOC's interpretation may
not be accurate. A 'one-step' devaluation for the yuan is impossible. There are
market mechanisms which will pay their roles. Moreover, the Chinese government
has repeatedly stated it would not let the yuan devalue."
In Peng's view, the yuan gained fast in the first quarter simply because of the
sharp devaluation of the US dollar. As the greenback rebounds, the yuan
appreciation will also slow down.
Internationally, China still faces growing pressures from its major trade
partners, the United States and EU in particular, to speed up the yuan
revaluation. A new round of Sino-US strategic economic dialogue will be held
next month. As in the past rounds, the US is expected to press on faster yuan
revaluation. Any move to deliberately devalue the yuan could inevitably sour
China’s trade, and even political, relations with its main trade partners,
which may be the last thing Beijing wants right now.
Domestically, the Chinese government sees inflation as public enemy No 1. The
rising prices are partially imported due to higher costs of commodities, raw
materials and energy on international markets. Any significant depreciation of
the yuan, while of
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