Yuan Needs 3% Gain to Stop Exit of ‘Hot Money,’ Researcher Says

By Judy Chen

March 10 (Bloomberg) -- China should let the yuan rise 3 percent against the dollar in 2009 to deter capital outflows and help the country make overseas acquisitions, said Wang Jian, a researcher affiliated with the nation’s top planning agency.

China’s foreign-exchange reserves grew by the least in more than four years in the fourth quarter as sliding exports prompted traders to step up bets on yuan depreciation. People’s Bank of China Governor Zhou Xiaochuan pledged last week to maintain yuan stability as investors pull money out of emerging- market assets because of slowing global economic growth.

“A weaker currency will prompt massive amounts of foreign capital to flee the country,” said Wang, secretary general of the China Society of Macroeconomics, a Beijing-based research institute under the National Development and Reform Commission that advises the government. “It won’t help exports. Foreign consumers still won’t have enough money to buy.”

At least $1 trillion of “hot money” may have entered China, Wang estimated, as the yuan gained 21 percent against the dollar since the central bank ended a fixed exchange rate in July 2005. Depreciation would risk spurring a sudden exit of those funds, causing turmoil in the financial system, he said in an interview yesterday.

The currency, which dropped 0.25 percent this year, closed at 6.84 per dollar yesterday in Shanghai, according to the China Foreign Exchange Trade System. Yuan 12-month non-deliverable forwards show traders are betting it will fall 1.7 percent to 6.96 in a year.

Attracting Capital

China should allow a “moderate” appreciation this year as the country seeks to diversify its $1.95 trillion in foreign- exchange reserves from U.S. Treasuries, according to Wang. Chinese investors held $696 billion of U.S. Treasuries as of Dec. 31, an increase of 46 percent from the prior year.

“A 3 percent in appreciation would attract more foreign capital into China to help us acquire assets overseas,” said Wang. “We should take advantage of the low prices and use reserves to buy more commodities, oil fields and valuable assets in the U.S.”

The Reuters/Jefferies CRB Index that tracks 19 commodities dropped 56 percent from a record high of 473.97 reached in July. Oil prices fell 68 percent from July’s all-time peak of $147.27 a barrel.

Merrill Lynch & Co.’s U.S. Treasury Master index shows the securities declined 0.5 percent last month, after falling 3.1 percent in January, as President Barack Obama sells record amounts of debt to fund his $787 billion bailout. Increased issuance of U.S. currency to help fund stimulus spending may also weaken the dollar, Wang said.

“If President Obama can’t raise enough money by selling government debt to save the economy, he will probably print more dollars, which will lead to declines in the U.S. dollar,” Wang said.

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net;