Last week, US Treasury Secretary Tim Geithner made an unscheduled visit to Beijing after having postponed the report that might have branded China a currency manipulator. While neither government commented on the specifics of the meeting, markets have taken the visit as a sign that China and the US are prepared to negotiate over currency revaluation and avoid retaliatory protectionist measures.
An improvement in diplomatic relations between Washington and Beijing has brought forward the market’s expectation of a move in the yuan. While a change in the coming days and weeks is still far from certain, the easing of political pressure will encourage a decision – the Chinese, unsurprisingly, will not want to be seen to bow to pressure from another country. They are therefore unlikely to significantly change their exchange rate stance in response to grandstanding by US officials.
So when, if not immediately, might China choose to make its move? Callum Henderson, global head of FX research at Standard Chartered, says: “We have consistently thought that either before the end of the second quarter or at the very start of the third quarter that China would revert to a gradual appreciation of the yuan. The delaying of the report by the US Treasury makes May or June more likely – it has to happen at a time when there does not seem to be any pressure.”
Economists within China also expect a move at some point over the summer. Essence Securities, a Chinese securities brokerage, said on Friday that China might revalue the yuan modestly between June and October.
With the Sino-US strategic and economic dialogue that is taking place in China at the end of May and the autumnal run-up to US mid-terms, “any time between the two will be politically the right time (for China) to reform the yuan regime”, its economists Gao Shanwen, Mo Qian and Gao Weidong said.
They added that China might revalue the yuan against the dollar as it did in July 2005, perhaps by as much as 2.1 per cent. It might also widen the yuan’s daily trading band against the dollar. But Essence said that any revaluation would be small, with a cumulative appreciation in 2010 of 3 per cent.
China said at the start of this year that it will make a move when it thinks the time is right, that the move would be gradual and that there would be no one-off move.
What is equally certain is that China will move in its own sweet time, and not to fit the timetable of US congressmen. “It is not something they adjust very much to the prevailing political pressure and they have a pretty good idea of what they want to do,” says Alan Gibbs, manager of the Waverton Asia Pacific Fund and head of funds at JO Hambro Investment Management.
So what will happen when China does finally decide to restart its policy of a gradual appreciation? Obviously, the Chinese yuan will start to appreciate against the US dollar – the current spot rate is around Y6.82 but Standard Chartered is forecasting Y6.67 by the end of the year. However, Standard Chartered’s Henderson says that the market may have already got a little ahead of itself when it comes to yuan revaluation so we could see a correction.
The bigger impact is likely to be on the other Asian currencies. They rallied across the board against the US dollar when Geithner announced the currency report postponement, so any actual change in policy will spark a rally in currencies such as the Malaysian ringgit and the South Korean won. Gibbs says that these currencies are already quite competitively priced as they have had to compete with China in the export markets. He thinks it is likely that there will be a medium- to long-term appreciation.
There is no doubt among forex experts that China will revalue the yuan this year. Less pressure from Washington, not more, will encourage Beijing to make the move that the US has been after and revert some time this summer to its policy of gradual currency appreciation.