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Friday, April 9, 2010

China may raise rates soon, revalue yuan by Oct

China might increase interest rates as early as this month, but Beijing will probably not resume yuan appreciation as soon as that, a senior government economist said on Friday.

Another one-off currency revaluation looked unlikely, said Zhu Baoliang, chief economist at the State Information Centre (SIC), a think-tank that comes under the National Development and Reform Commission, China's powerful planning agency. "I believe a band widening is possible but another one-off revaluation is unlikely. The yuan might be pegged to a basket of currencies," he said.

Zhu's comments are a reflection of the constant lively discussion among researchers, academics and officials in Beijing about the appropriate policy mix to adopt at a given time. Different ministries and agencies argue their corner, as they do in multi-party states, before top Communist Party leaders arrive at a consensus. This is the process now unfolding with regard to the yuan, with a growing body of opinion in favour of ditching the yuan's dollar peg established in July 2008.

A research note by China's Essence Securities on Friday said China might revalue the yuan modestly between June and October. Economists Gao Shanwen, Mo Qian and Gao Weidong noted that the Sino-US Strategic and Economic Dialogue will take place in China at the end of May, while the run-up to mid-term US Congressional elections on November 2 might put trade and exchange rate issues in the spotlight. "So any time between the two will be politically the right time (for China) to reform the yuan regime," they wrote.

China might revalue the yuan again, as it did by 2.1 per cent against the dollar in July 2005; and China might also widen the yuan's daily trading band against the dollar, they said. But the economists added that any revaluation would be small, with cumulative appreciation in 2010 of 3 percent.

Benchmark dollar/yuan one-year non-deliverable forwards (NDFs) were bid at 6.6150 at midday, implying 12-month yuan appreciation of 3.19 per cent measured from the Chinese central bank's daily mid-point. China is very close to announcing a shift in its currency policy, including a "small but immediate" revaluation of the yuan, the New York Times reported on Thursday.

Zhu with the SIC repeated his view that China would let the yuan resume its gradual rise at some point this year to help fight inflation, with a widening of the daily trading band. The yuan is now permitted to rise or fall 0.5 per cent a day against the dollar. "I think if property prices continue to rise sharply, the central bank may have to raise interest rates as early as this month," he said. "Inflation expectations could grow due to surging property prices while the worsening drought may also have an impact on prices," he added.

As recently as Wednesday, Zhu was expecting the central bank to stand pat until July. He said he had brought his forecast forward because the
property sector had showed no signs of cooling. Consumer price inflation in March could be lower than the 2.7 per cent rate in February, but could reaccelerate to as high as 4 per cent, Zhu predicted.

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