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Will China Revalue The Yuan?

Last updated 11/13/2009 5:05 AM ET (GMT -5) 2 Comments

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Boris Schlossberg

Director of Currency Research, GFT

The pressure on China to revaluate the yuan continued at the Asia Pacific Economic Cooperation meeting today after yesterday statement by the region’s finance ministers noted that, "We will undertake monetary policies consistent with price stability in the context of market-oriented exchange rates that reflect underlying economic fundamentals."

China’s neighbors in Asia have seen their currencies appreciate in the wake of a weakening dollar – a trend that has Korea, Thailand and many of the other export oriented economies greatly concerned especially as the yuan remains pegged to the dollar providing Chinese manufacturers with a competitive advantage on the global stage.

China’s President Hu Jintao attempted to soothe the tensions by telling the gathering that the world’s most populous nation will take “vigorous” steps to boost household spending and reduce a reliance on investment and exports for economic growth.   However, he failed to mention the currency issue and officials from PBOC later stated privately that any revaluation in the yuan will be gradual at best.

Amongst the G-10 the yen will be the biggest beneficiary of any potential yuan revaluation because Japan both competes with China globally and at the same time exports heavily to that market. In fact China is Japan’s largest export market exceeding even US. Thus, Japanese manufactures should be able to earn more income on their Chinese revenues and at the same time find some relief on their margins in their battle with Chinese competitors.

However, we believe the impact of any yuan revaluation is likely to be minimal if Chinese follow the same script as in 2005 when they loosened the peg at a glacial pace allowing the yuan to appreciate by no more than 3%-5% over the course of the year. While stressing the need to grow domestic demand, Chinese policymakers continue to rely on exports as a foundational driver of growth and any action with respect to the yuan are likely to be a political gesture rather than genuine economic reform.

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Comments (2)

Liverpinguin

November 13, 2009 at 05:20 AM ET

Hi boris, related to the last lines of your article,
you do not really believe the Chinese Authorities about Revaluation of the Yuan, do you? similar to the FED about Strong Dollar??, right

hsbc

November 13, 2009 at 05:28 AM ET

china is one of the biggest if not the biggest holder of ust. a cny revaluation will only harm them. moreover export sector is still lagging in china

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.