China May Revalue Yuan by 3.5%, Societe Generale Says

China May Revalue Yuan by 3.5%, Societe Generale Says

http://www.bloomberg.com/apps/news?pid=20601089&sid=a.sAu4rHqOvs&refer=china

By Jake Lee


Chinese yuan. July 19 (Bloomberg) -- China may strengthen the yuan by as much as 3.5 percent in a single day to cool the economy and appease U.S. lawmakers, said Glenn Maguire, chief Asia economist at Societe Generale SA.

The world's fastest-growing major economy last revalued the currency two years ago by 2.1 percent, abolishing a decade-old fixed exchange rate, and has since allowed it to gain a further 7.2 percent. China grew at the fastest pace in 12 years last quarter and inflation breached the central bank's 3 percent target for a fourth month, a report today showed.

``The prospect of a one-off revaluation, which the market hasn't factored in, is quite possible,'' Hong Kong-based Maguire said yesterday. ``They may move 2.5 to 3.5 percent, rather than persisting with this gradualist appreciation.''

A stronger yuan may slow the economy by making goods sent overseas more expensive, helping reduce China's record trade surplus. The appreciation also may deflect criticism from U.S. politicians, who are proposing new duties on exports from countries that use their currencies to put American companies at a disadvantage.

The yuan rose as high as 7.5615 against the dollar, the strongest since China started managing it against a basket of currencies of its trading partners on July 21, 2005. It was at 7.5638 as of 1:37 p.m. in Shanghai. The yuan is allowed to move up to 0.5 percent from a daily rate fixed by the central bank.

`Overheating Politicians'

People's Bank of China Governor Zhou Xiaochuan said after talks between U.S. and Chinese economic leaders in Washington in May that the two nations agreed on the direction of yuan reform, while disagreeing on the speed. U.S. congressmen ``think we can accelerate it, but we think it's already moving fast enough and we have tried our best,'' Zhou said.

Chinese Premier Wen Jiabao last year ruled out a sudden revaluation of the yuan. He's outlined three guiding principles for adapting China's exchange-rate policy: ``Independent initiative, controllability and gradualism.''

The Chinese currency hasn't ``risen fast enough,'' Senator Charles Grassley said July 10. He accuses China of keeping its currency weak to aide exports, contributing to the U.S. trade deficit. Grassley is among senators who have proposed legislation that would allow U.S. companies to petition for steeper anti- dumping duties against countries that keep their currencies undervalued.

A revaluation would be a ``direct appeasement to overheating Washington politicians,'' Maguire wrote in a research report. He sees the yuan rising 5 percent by year-end, finishing at 7.20, the most bullish of 27 economists surveyed by Bloomberg News.

No Policy Change

Irene Cheung, an economist at ABN Amro Bank NV, predicts gains of 2.2 percent to 7.40, saying China will use other tools to cool the economy. China has raised interest rates twice this year and ordered lenders to set aside more reserves five times to stifle lending and investment.

``Whether there's external or internal measures, they're not going to change policy on the yuan and are comfortable with the current pace,'' said Singapore-based Cheung. ``We've seen episodes when the markets get very interested in the yuan, and then less so. Right now, it's less so.''

Maguire says monetary tools used by China haven't worked, so they'll turn to a stronger yuan. Gross domestic product expanded 11.9 percent from a year earlier, the statistics bureau said today, exceeding the estimates of all 23 economists surveyed by Bloomberg. Inflation climbed to 4.4 percent in June, the fastest since September 2004.

``China's economy continues to be characterized by excessive profits,'' said Maguire. ``The easiest way to cool profits remains a faster pace of yuan appreciation.''