China Is ‘Highly Unlikely’ to Devalue Yuan, Yu Says

By Kim Kyoungwha

Dec. 8 (Bloomberg) -- China is “highly unlikely” to favor a weaker yuan because the government will rely more on spurring domestic demand than exports to support the economy, a former adviser to the central bank said.

Twelve-month forward contracts rose for a second day as traders scaled back bets on depreciation after Chinese officials told U.S. Treasury Secretary Henry Paulson last week the yuan will be kept stable. The central bank last week allowed the biggest decline since ending a fixed exchange rate to the dollar in 2005, prompting speculation it favors a weaker currency.

“It is highly unlikely that China will reverse its course,” Yu Yongding said in an interview via e-mail. “The export sector can and should be helped by means other than devaluation. Why should China do something that is not in its long-term interests and whose impact in the short-run is uncertain?”

Yu, , now a senior fellow at the Chinese Academy of Social Sciences, said China should stimulate domestic demand after the world’s fourth-biggest economy grew 9 percent in the third quarter, the slowest pace since 2003. Policy makers cut interest rates by the most in 11 years and announced a $586 billion economic stimulus plan last month to spur domestic demand.

The one-year non-deliverable forwards rose 0.7 percent today, after a 3.3 percent drop on Dec. 1. The contracts showed the currency will weaken 3.5 percent to 7.1350 a dollar in a year, compared with 7.1850 at the end of last week. Forwards are agreements in which assets are bought and sold at current prices for settlement at a later time. Non-deliverable contracts are settled in dollars.

‘Just a Blip’

The currency traded little changed at 6.8817 a dollar in Shanghai as of 11:26 a.m., compared with 6.8812 on Dec. 5, according to the China Foreign Exchange Trade System. It dropped 0.7 percent on Dec. 1.

The yuan’s 20 percent gain since the peg has squeezed exporters’ profits and helped cause the closure of two-thirds of China’s small toy exporters in the first nine months of this year.

“I regard the recent devaluation as just a blip,” Yu said in comments e-mailed on Dec. 5. “Of course, many people here are happy to see the yuan devalue. However, I do not think a devaluation of the yuan can do much to shrink China’s trade surplus. More importantly, China should be happy to see a more balanced trade account.”

‘Not Viable’

China’s trade surplus was a record $35.2 billion in October, bringing this year’s total to $216 billion, compared with $262 billion for all of 2007, the customs bureau said Nov. 11. Currency reserves are approaching $2 trillion.

The International Monetary Fund said Nov. 24 that China’s economy, the biggest contributor to global expansion, will grow 8.5 percent in 2009, as the Asia-Pacific region slows to 4.9 percent. The IMF predicted the U.S. economy will shrink 0.7 percent and Europe’s 0.5 percent.

China will continue to let the market play a “primary role” in establishing the value of its currency, Assistant Finance Minister Zhu Guangyao said in a press briefing on Dec. 5 after two days of the Strategic Economic Dialogue with the U.S. in Beijing. Paulson said the same day that China is still committed to the appreciation of the yuan over time.

“It is too early to be sure, but it may just be that the Chinese authorities are just tapping the brakes on the pace of the yuan’s up trend rather than seeking a reversal,” said Sean Callow, a senior currency strategist in Sydney with Westpac Banking Corp. “At this point, we are inclined to view the extent of the non-deliverable forward reaction as excessive.”

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net;