China to Overlook Call for Yuan Gain, Researchers Say

By Bloomberg News

Nov. 10 (Bloomberg) -- China, rejecting calls from Europe and Japan, will keep the yuan from gaining against the dollar until exports revive, state researchers said.

Policy makers are unlikely to allow the currency to resume its appreciation this year after keeping it almost unchanged since July 2008, Beijing-based Zhu Baoliang, the chief economist at the State Information Center, said in an interview yesterday. China will stick with its “tough stance” on the currency, Zhang Ming, a researcher at the Chinese Academy of Social Sciences, said in a separate interview.

European Central Bank President Jean-Claude Trichet and Japanese Vice Finance Minister Yoshihiko Noda called last week for the yuan to strengthen. The U.S. Treasury Department said last month that a “lack of flexibility” in China’s exchange- rate and a buildup of foreign-exchange reserves “risk unwinding some of the progress made in reducing imbalances.”

“Foreign pressure won’t push the government to resume appreciation,” Zhu said from the State Information Center, an affiliate of the National Development and Reform Commission, China’s top economic planning agency. “There is no domestic pressure for the yuan to appreciate because exports are still having a year-on-year decline.”

Central bank Governor Zhou Xiaochuan responded to European and Japanese calls for a stronger yuan on Nov. 6, saying that global pressure on appreciation “is not that big.” World Bank Chief Economist Justin Lin said in a lecture at the University of Hong Kong yesterday that China shouldn’t be forced to let its currency appreciate because it may slow a global recovery, the Wall Street Journal reported.

President Barack Obama said in an interview with Reuters yesterday he will bring up currency issues when he visits Beijing next week. China’s policy will be “proactive, controllable and gradual,” Foreign Ministry spokesman Qin Gang said at a regular briefing today. He added that the government needs “to increase the flexibility” of the exchange rate.

Stable Yuan

China, the third-largest economy, has kept its currency at about 6.83 per dollar since July 2008, after a 21 percent gain the previous three years. As the dollar weakened against the euro and yen, the yuan slid 11 percent against the European currency and 10 percent against Japan’s in the past six months.

The yuan closed at 6.8268 per dollar in Shanghai, according to the China Foreign Exchange Trade System. Twelve-month non- deliverable forwards for the yuan fell 0.4 percent to 6.6295. The contracts reflected bets for the currency to rise 3 percent in a year.

China is preventing its currency from appreciating after overseas sales slumped 11 straight months through September. Exports fell 13 percent from a year earlier in October, the smallest decline this year, according to the median estimate of 31 economists surveyed by Bloomberg. The customs bureau will release the latest export data tomorrow.

Appreciation Forecasts

The currency will strengthen to 6.7 per dollar by June 30, according to the median estimate of 25 analysts in a Bloomberg News survey. The yuan has a 73 percent chance of rising to that level by the end of the first half of 2010, implied volatility from options trading monitored by Bloomberg showed.

China’s economy expanded 8.9 percent in the third quarter, the fastest pace in a year, according to official data. The government is targeting growth of 8 percent in 2009.

Rising asset prices and capital inflows may “persuade” the central bank to allow the yuan to appreciate next year, the Chinese Academy’s Zhang said from Beijing. It may rise about 5 percent against the U.S. currency, he said.

The Shanghai Stock Exchange Composite Index climbed 76 percent this year, the 10th best performer among 89 benchmark measures tracked by Bloomberg. China’s foreign-exchange reserves have risen 19 percent in the past year to a record $2.273 trillion because of capital inflows and a trade surplus.

“Even when the central bank wants to change the yuan policy, it will have to deal with pressure from the commerce ministry and local governments in the coastal areas,” Zhang said.

Inflation Risk

Consumer prices slid 0.8 percent in September from a year earlier. Government data to be released tomorrow may show prices fell 0.4 percent last month, a separate Bloomberg survey showed.

China, which buys U.S. dollars to prevent the yuan from appreciating, was the biggest foreign holder of U.S. government debt in August with $797.1 billion, Treasury Department data show. Premier Wen Jiabao said in March that he was “worried” about the weakening dollar eroding the value of its reserves.

The Dollar Index, which tracks the greenback against currencies of six major trading partners, dropped 7.6 percent this year, the most since 2007.

The government will probably allow a 3 percent to 4 percent increase in the yuan next year to curb the size of reserves and preserve their value as the dollar declines, said Shen Minggao, chief economist in Hong Kong for Greater China at Citigroup Inc.

“Capital inflows to China have quickened and the growth in China’s exchange reserves remained fast, which seems hard to sustain,” he said. “The yuan’s appreciation is not only called for overseas, it’s also in line with China’s own interest.”

--Judy Chen, Belinda Cao. Editors: Shanthy Nambiar, Sandy Hendry

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at +86-21-6104-7047 or Xchen45@bloomberg.net.