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Saturday, March 5, 2011

Macroeconomic indicators - Yuan rise to play role in big China economic shift


Saturday, 05 Mar 2011

Reuters reported that China is in the early stages of an economic rebalancing act that makes a stronger currency an almost inevitable part of the mix and a sustained yuan rise may come far sooner than many foreign players are expecting.

Beijing has started taking broad steps to wean itself off exports and promote greater domestic spending while trying to cope with what appears to be a sustained rise in inflation all of which point to yuan appreciation. While higher inflation in China compared with major trading partners will lead to a stronger real trade weighted exchange rate, traders believe that authorities certainly don't want inflation alone to be the driver meaning that nominal appreciation is part of the equation.

Several FX traders on the mainland think that this change is just starting to take shape, underscored by the yuan march to record highs and should reaffirm the consensus expectations for 5% to 6% appreciation this year contrary to the cautious pricing in the dollar/yuan NDFs.

A senior trader at a Chinese commercial bank in Shenzhen said "China has already started a process to adjust its economic structure and the previous strategy to keep the yuan value at a relatively low level so as to help boost exports will gradually phase out."

The trader said "The yuan will thus increasingly move in line with China economic fundamentals and the most important factor in the fundamentals this year will be high inflation. So the yuan exchange rate will be used in the anti-inflation campaign."

Traders have become more convinced that the People Bank of China will allow more currency strength thanks to calming currency tensions with the United States, especially after the US Treasury declined to name China a currency manipulator in a report last month.

Those currency tensions appear to have prevented China, always loath to be seen bowing to foreign pressure, from allowing as much yuan appreciation as it might have. Now that the hot button yuan has slipped off the diplomatic radar screen, Beijing is more comfortable letting the currency rise.

The PBOC's own actions have also given traders more confidence that further currency strength is in store with the central bank guiding the Chinese currency to a slew of record highs this year.
(sourced:Reuters)

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