China may reconsider yuan peg, analysts say Yumi Kuramitsu...

China may reconsider yuan peg, analysts say
Yumi Kuramitsu Bloomberg News Monday, December 29, 2003

China, which this year has resisted international pressure to revalue its currency, may agree to bury the yuan's decade-old peg to the dollar in 2004 as it looks for ways to cool economic growth and ward off inflation, investors and analysts say.
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In recent months, China has been buying the U.S. currency in international markets in order to maintain a fixed exchange rate of around 8.28 yuan per dollar, which was set in 1994. The effort, which puts more money into circulation in China, threatens to exacerbate inflation, which the government has said accelerated to a rate 3 percent in November, the fastest in six and a half years.
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"China needs exchange rate flexibility," says Fred Hu, chief China strategist at Goldman Sachs Group in Hong Kong. "The economy is booming, inflation is heating up and money and credit growth is so fast. That implies China would be better off to do this sooner rather than later."
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China's economy, the world's sixth largest, will expand by 8 percent in 2004, from an estimated 8.6 percent this year, the fastest among the world's top 10 economies, according to a Bloomberg News survey. Such red-hot growth recently prompted the U.S. Federal Reserve chairman, Alan Greenspan, to warn that Beijing's efforts to maintain the dollar peg risked "overheating" China's economy.
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Seven of 11 currency analysts surveyed recently by Bloomberg News said that they expected China to revalue the yuan by the end of 2004, most likely through a widening of the range in which the currency is allowed to fluctuate against the dollar. Two of those polled predicted that China would adopt a peg against a basket of currencies, including the dollar, and two forecast no change.
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Chinese officials have said that a stronger yuan would make exports too expensive, derailing economic growth needed to create jobs as it slims state-owned companies.
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Zhou Xiaochuan, governor of the People's Bank of China, said in September that the central bank was willing to discuss the idea of linking the yuan to a basket of currencies - an idea proposed by the International Monetary Fund in 2002. But analysts noted that such a regime would probably not result in an immediate change to the yuan's value.
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"Any basket would be a very close image of the current single-currency peg," says Robert Rennie, chief currency strategist at Westpac Banking in Sydney. The value of the yuan would still be "very closely managed," he says.
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Ma Kai, chairman of the State Development and Reform Commission, China's top economic planner, warned this month that any immediate change to the yuan-dollar peg would be destabilizing to China's economy. "If China did revalue the yuan, it would only introduce disruption to China and cause instability globally," Ma said.

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