China May Resume Yuan Float, Avoid Sharp Revaluation (Update2)

By Bloomberg News
March 26 (Bloomberg) -- China may allow the yuan to trade more freely against the dollar, while avoiding an abrupt revaluation that would wreck its exports, according to Fan Gang, an adviser to the country’s central bank.
"China may resume a managed float of its exchange rate, particularly if the uncertainty of the overall post-crisis economic situation diminishes," Fan wrote in an opinion piece published today in China Daily, a government-backed English language newspaper. "If the adjustment came abruptly, Chinese companies would suffer a sudden loss of competitiveness."
Fan echoed People’s Bank of China Governor Zhou Xiaochuan’s comments this month that the nation will "sooner or later"
exit its anti-crisis policies, which included pegging the yuan to the dollar since July 2008. Vice commerce minister Zhong Shan said in Washington this week that foreign pressure for China to revalue the yuan won’t succeed, commenting after five U.S.
senators proposed legislation last week that would allow action to address exchange-rate "misalignments."
Twelve-month non-deliverable yuan forwards rose 0.2 percent to 6.6710 per dollar as of 5:30 p.m. in Hong Kong, according to data compiled by Bloomberg. The contracts reflect bets the currency will strengthen 2.3 percent in the coming year from the spot rate of 6.8270. The yuan was allowed to appreciate 21 percent in the three years before the current peg was introduced.

Inflation, Trade Gap

The timing of any shift in currency policy will depend on the pace of inflation and China’s trade surplus, said Hua Ercheng, the Beijing-based chief economist at China Construction Bank Corp., the nation’s second-largest lender.
"The central bank may need to let the exchange rate move first before raising interest rates if inflation quickens and the trade surplus widens again," said Hua, a former economist at the International Monetary Fund.
Central bank Deputy Governor Zhu Min said yesterday that interest rates are a "heavy-duty weapon" and alternative tools for addressing liquidity are working well, helping to explain why the bank hasn’t raised borrowing costs. Consumer-price gains accelerated to a 2.7 percent pace in February, the fastest in 16 months.
Fan’s office said he was traveling and unavailable to comment on his reported remarks.

‘Basically Stable’

The Treasury Department will decide next month whether to label China as manipulating its currency, a designation not invoked since 1994. Chinese Premier Wen Jiabao said three days later that the yuan was not undervalued and policy makers aim to keep the currency "basically stable."
The threat of protectionism is boosting the likelihood that the yuan will resume gains this half, according to Michael Buchanan, a Hong Kong-based economist at Goldman Sachs Group Inc.
He predicts a 5 percent strengthening this year.
"Our baseline view remains that the appreciation will occur in the second half of 2010, but the risks of a slightly earlier move are growing," Buchanan wrote in a note dated yesterday. "It is never practical to pre-announce a change in a fixed exchange rate regime, given the incentive for capital flows."

‘Currency Manipulator’

The U.S. won’t create or protect jobs should Chinese products become uncompetitive because those imports will be substituted by goods from other low-cost countries such as Vietnam and India, Fan wrote in today’s piece, which was also published in the Melbourne-based Age newspaper.
Harvard University historian Niall Ferguson called China a "currency manipulator" and urged the U.S. to get support from the Group of 20 Nations to press Beijing to allow the yuan to appreciate.
"There’s no question that China is a currency manipulator if the phrase has any meaning at all," Ferguson said in an interview on Bloomberg Television yesterday.
Premier Wen said this week a planned meeting of Chinese and U.S. officials in May would help "address disputes and problems." He said China’s trade deficit for early March was $8 billion, compared with a surplus of $7.6 billion last month.
China’s dollar purchases to maintain the link have driven currency reserves to $2.4 trillion and flooded the financial system with yuan. Chinese investors held $889 billion of Treasuries on Jan. 31, making it the biggest overseas holder of such debt.
The U.S. pressure on China for yuan gains won’t benefit its producers, and the Chinese government won’t yield to external pressure in selecting policy tools, said Liu He, one of the top advisers to Chinese leaders in Beijing today. Liu reiterated China and other nations need to maintain currency stability because the financial crisis isn’t over yet.
"No matter where China’s exchange rate is, it won’t directly benefit U.S. producers, but may add to U.S. consumers’
costs," said Liu, also the vice minister of the office of the Central Leading Group on Financial and Economic Affairs. So pressing China "won’t be in the interest of the U.S."

I am a fan of the CYB ETF which tracks the renminbi. Is there any other product that could allow me to bet on currency appreciation in China?

Batman wrote:

I am a fan of the CYB ETF which tracks the renminbi. Is there any other product that could allow me to bet on currency appreciation in China?

Actually a mutual fund in USD investing on chinese stocks would do the trick and would allow you to combine :
- the growth of chinese stock market
- the increase of the yuan

For most of my long mutual equity fund bucket, I've been long an Asian equity funds since the beginning of this year and it outperforms everything else.

Any particular index or sector you suggest within the Chinese equity market? I would be looking for something steel or commodity related in general.

Batman wrote:

Any particular index or sector you suggest within the Chinese equity market? I would be looking for something steel or commodity related in general.

Sorry old friend, I can't help here, I just don't know

I guess I'll just dabble with FXI for now...

Sauros wrote:

Batman wrote:

Any particular index or sector you suggest within the Chinese equity market? I would be looking for something steel or commodity related in general.

Sorry old friend, I can't help here, I just don't know

That's precisely I delegate the task of picking to an asset manager...
In this case, I'm not sure I know 10 chinese companies name