Commerce Minister Chen Deming said a haltto the Yuan's appreciation since mid-2008 was part of a panoply of progrowthpolicies to prop up the economy during the global credit crunch. "Exitingfrom the stimulus does not mean all these measures will disappear. They willstill be there, but there will be some fine-tuning," Chen told on thesidelines of the country's annual session of parliament. China has effectively re-pegged its exchange rate at around 6.83 Yuan per dollar since mid-2008 tohelp its exporters during the global financial crisis and is under intensepressure from the United States and Europe to abandon the peg.


The movement and degree of stability in the yuanin times of crisis ought to be different from when there is no crisis," hesaid. But he added: "The direction of Yuan reform will be gradual andcontrolled."


Central Bank Governor Zhou Xiaochuan, has alsostressed the need for policymakers to proceed with caution. But Zhou broke newground by stating that exiting the stimulus would sooner or later spell the endof the "special Yuan policy" adopted to counter the financial crisis.


"This is the most explicit comment on therenminbi's exit from current de-facto peg made publicly by top Chinesepolicymakers so far," HSBC's Chief China Economist, Qu Hongbin, said in anote to clients. The Yuan is also called the Renminbi. He said strongereconomic growth, rebounding exports and the emergence of inflationary pressuressupported his view that China would move away from the Yuan's peg as early asnext quarter. "Yet the pace of appreciation will likely be gradual. Weexpect USD/CNY exchange rate at 6.50 at the end of this year."


Don't Get Carried Away


The Yuan rose modestly in the offshorenon-deliverable forwards (NDFs) market in response to Zhou's remarks. Theone-year dollar/Yuan NDF hit a five-week low of 6.6200, falling from Friday'sclose of 6.6500. It recovered to 6.6420 in late afternoon, implyingappreciation of about 2.85 percent over the next 12 months. A dealer at aEuropean bank in Shanghai cautioned against over-reacting to Zhou's comments.The central bank, eager to curb inflation and achieve a better balancedeconomy, may want a stronger exchange rate. But other parts of the government,including the Ministry of Commerce, care more about protecting exports, hesaid. "So I think NDFs should not over read Zhou's comments to predict animmediate and steep rise in the Yuan," he added. Indeed, Chen said Chineseexports would not truly recover until the global economy had put the crisisfully behind it. "If external demand has not recovered yet, how can wehave a fundamental recovery?" Chen said.


Wu Xiaoling, a former Central Bank Vice Governoragreed that China would not focus on medium-term market-oriented reforms,including greater Yuan flexibility, until global markets have stabilized. Wu, aparliamentary delegate, mused that the Yuan might not necessarily beundervalued if China's natural resource and labor costs matched global levels."A country's currency rate is decided by market supply and demand in theshort term. Fundamentally, it has also something to do with domesticprices," she told a news briefing.


Back the Dollar


Speaking separately to reporters, a top statebanker said any speculation that China might stop supporting the dollar in thenext few years was "absolute nonsense." Li Ruogu, Chairman ofExport-Import Bank of China, a lender tasked with supporting the country'sforeign investments, said China should aim to stabilize the dollar andpreserving its status as the leading global currency. China has $2.4 trillionin official reserves, the largest stockpile in the world, and bankers believeabout two-thirds of the total is invested in dollar assets. "I believethat, for now, supporting the dollar's stability and its international currencystatus is good for China," Li, a former deputy central bank governor, saidin a group interview. "As China has a huge sum of foreign exchangereserves, a dollar collapse would bring nothing good to China," he added.



Originally published in The Stitch Times: April 2010