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What Will It Take For China To Revalue the Yuan?

Last updated 3/15/2010 3:08 AM ET (GMT -5) 12 Comments

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Boris Schlossberg

Director of Currency Research, GFT

At  a press conference on Sunday Chinese Premier Wen Jiabao dismissed the possibility of a yuan revaluation in the near term noting concern over the “the unsteady, uncoordinated and unstable development of the Chinese economy," and even bringing up the specter of a “double-dip” recession. In words that no doubt many US authorities will find especially ironic,  Wen stated, “"I understand that some countries want to increase their exports, but I don't understand the practice of depreciating their currency and forcing others to appreciate theirs in order to accomplish this. I think this is a type of trade protectionism."  

The US officials of course have long accused China of manipulating its currency by pegging the yuan to the dollar and keeping the exchange rate artificially low in order to boost the country’s exports. Although Wen’s position on yuan revaluation suggests that Chinese policymakers are willing to jeopardize some diplomatic goodwill over the issue, we believe their motives to be largely economic rather than political.

As we noted last week, we doubt that the Chinese will be willing to move on the issue of currency revaluation  until they are absolutely certain that the US economy  can join China as the second major pillar of global economic growth in 2010. Up to now, the Chinese have  almost single handily spurred the global economic recovery through their massive fiscal stimulus programs that helped fuel domestic driven demand.  However,    Chinese officials continue to be concerned over the fragility of global recovery and are unlikely to make any meaningful adjustments to their currency policy until they are certain that the US recovery is sustainable. In practical terms that indicates that Chinese policy officials will not even consider  making a move on the revaluation front until US labor markets show several months of positive job growth.

Wen Jiabao remarks had relatively little impact on currency trade. Risk FX sold off mildly on concerns over the escalation of hostilities between the world two most important economies, but began to rebound  in early European trade. The US Treasury is scheduled to release its annual report on international currency practice on April 15th and if it brands China to be a currency manipulator,  then the conflict could result in more significant turbulence in currency markets.

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Comments (12)

MoneyManager

March 15, 2010 at 04:01 AM ET

Kindly elaborate a bit on how you might expect such "turbulence" to play out. Thanks.

bschlossberg

March 15, 2010 at 04:06 AM ET

Its difficult to say yet but the initial trade would likely be negative risk if markets begin to fear protectionism

MoneyManager

March 15, 2010 at 05:27 AM ET

Fair enough, but would you expect recent correlations between risk and USD/JPY, for example, to continue, or would you be looking for divergence? (Yeah, I want you to take a stand.) ^_^

hsbc

March 15, 2010 at 05:08 AM ET

this should cause usdjpy to trade higher, agree?

MoneyManager

March 15, 2010 at 05:15 AM ET

You always need to consider what the previous expectations were, if you can parse them. For example, if most market participants assumed revaluation was around the corner, they may have short positions that need to get covered in light of Wen's comments, in which case your assumption might be absolutely right. But, maybe most market participants figured the Chinese were going to have nothing to do with revaluation anytime soon. In that case, there would be few shorts to cover, and perhaps new shorts to be initiated, which might make the pair trade lower.

Now you know another reason economics is called the dismal science. ^_^

hsbc

March 15, 2010 at 05:46 AM ET

stop signing off with smiley faces. its for girls

MoneyManager

March 15, 2010 at 07:06 AM ET

hsbc: Think about what you just wrote. Now think about it again. When you figure it out, or when you decide you can't figure it out, you should apologize. And be careful about writing too much, because people might figure out exactly what you know, and what you don't. ^_^

HS

March 15, 2010 at 06:17 AM ET

The Yuan sure gives China a competitive advantage and I don't really see why it will simply let go of that.....

MoneyManager

March 15, 2010 at 07:31 AM ET

From the standpoint of mercantilism, yes, an advantage. But it also has the potential to unleash dangerous inflation, which is political dynamite. So the Chinese leadership may decide that it's better to remain leaders than it is to endlessly keep the dollar peg. I think right now you are seeing a nationalistic backlash against foreign pressure. The Chinese leadership may likely *want* to loosen the peg, but they don't want to be seen reacting to foreign pressure. Remember that "face" counts in the East.

bschlossberg

March 15, 2010 at 07:40 AM ET

Gentlemen - no personal insults on this board or I will ban you forever. As to yuan - if Us brands them a currency manipulators that escalates concerns of a trade war and that is actually bad risk and negative USD/JPY because carry trade is unwound.

MoneyManager

March 15, 2010 at 08:33 AM ET

If the US goes that far, you are probably right. It's amazing what damage domestic posturing can do. US politicians want to be seen by voters as "doing something", even if what they do is foolish. And Chinese leaders don't want to be seen as caving in to foreign pressure, even though it might be the smart thing to do for their own economy.

hsbc

March 15, 2010 at 11:46 AM ET

money manage ... who do u think u are?r

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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.