China lets currency rise at a rapid pace

China lets currency rise at a rapid pace
By Keith Bradsher The New York Times

Published: September 28, 2006 – International Herald Tribune

HONG KONG China's government allowed the country's currency to rise through 7.9 to the dollar for the first time on Thursday, the latest in a series of daily highs as its pace of appreciation has mysteriously accelerated.

The currency, known as the yuan or renminbi, has now been rising most days for the past month, climbing 0.8 percent since the start of the month, which works out to an annualized pace of 10 percent. That compares with an annual pace of 2 percent to 2.5 percent during most of the months after China's 2.1 percent revaluation on July 21, 2005.

"The reality is they're moving at a faster pace," said Jonathan Anderson, the chief Asia economist at UBS.

Top Chinese officials, almost always reticent about the value of the country's currency, have been especially quiet over the past two weeks.

Even before the World Bank and International Monetary Fund annual meetings in Singapore at the start of last week, Chinese officials had contented themselves with repeating their longstanding promises to let the market start playing a greater role in the currency's value, without giving any indication of a timetable.

Beijing's leaders have long bridled at foreign criticism, prompting some China watchers to suggest that quiet diplomacy may be more productive in bringing about an appreciation of the yuan than confrontation. Treasury Secretary Henry Paulson Jr., with decades of experience in dealing with China while at Goldman Sachs, has pursued a much more low-key approach to the currency issue this summer than his predecessors or U.S. lawmakers, preferring to raise the issue in private with Chinese leaders.

That has prompted some experts to speculate that the change of tactics may have influenced the Chinese decision to allow faster appreciation now, possibly as a way to reward such behavior on the part of the United States.

"The Chinese are doing this as a gesture of good will," said Tao Dong, chief Asia economist at Credit Suisse.

But the yuan's acceleration also comes at a time when the Chinese economy seems to have settled down to sustained but controlled growth, which may make Chinese officials more prepared to experiment a little more with the value of the yuan.

After signs emerged last spring of possible overheating in investment, China's central bank raised interest rates and tightened bank reserve requirements while other regulators cracked down on provincial officials who proceeded with projects without receiving the central government's permission first. The result has been a slight tempering of growth, from industrial production, to retail sales to the money supply.

The exception among Chinese economic statistics these days is the trade surplus, which is soaring and has set records for four months in a row through August.

"The one big problem sticking out in China like a thumb, like a five-ton thumb, is the trade surplus," said Anderson, the UBS economist.

A stronger yuan makes Chinese exports more expensive in foreign markets, while making imported goods more competitive in China, two effects that could tend to shrink the trade surplus in the long run.

The People's Bank of China, the country's central bank, said when it revalued the currency in July 2005 that it would start setting the value of the yuan based on a basket of foreign currencies, and would no longer peg it just to the dollar. But in practice, the central bank has allowed the yuan to appreciate at a fairly steady but very gradual pace against the dollar; statistical analyses of changes in the yuan's value have shown almost no correlation to currencies other than the dollar.

Through capital controls and other measures, the People's Bank of China has made sure that spot trading of the yuan is conducted only in Shanghai, where the central bank is heavily involved in trading and sets the benchmark exchange rate between the yuan and the dollar each morning.

To prevent the currency from appreciating more rapidly, the central bank has bought dollars and sold yuan on a massive scale, accumulating the world's largest foreign exchange reserves, which are on track to reach $1 trillion in the coming weeks.

The yuan rose 0.07 percent in Shanghai trading on Thursday to trade at 7.8965 at 5:30 p.m., and has climbed at an annual rate of 17 percent in the last two weeks.

The yuan's latest rise above 7.9 to the dollar could create problems for the Hong Kong dollar, which is pegged in a narrow band of 7.75 to 7.85 to the dollar. The Hong Kong Monetary Authority has said repeatedly that it has no plans to abandon this trading range and start pegging the currency to the yuan.

But speculation that the Hong Kong Monetary Authority may shift the Hong Kong dollar to a yuan peg when the two currencies reach parity have periodically shaken currency markets. As the yuan approaches the same value as the Hong Kong dollar, " that might invite a lot of speculation for the Hong Kong dollar peg," said Liang Hong, a China economist at Goldman Sachs.

http://www.iht.com/articles/2006/09/28/business/yuan.php