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| Conflicting signals about the yuan |
| Wei Gu / Mar 09, 2010, 00:32 IST |
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Renminbi: China’s central bank governor has sent out clearest signal yet that the yuan might be allowed to appreciate. But investors shouldn't get too excited. Beijing still seems a long way from forming a clear view on managing the Chinese currency.
The weekend comments from Zhou Xiaochuan pushed the yuan to a five-week high against the dollar in forward markets on March 8. That is in spite of Premier Wen Jiabao said a day earlier that the currency will be kept stable in 2010.
China is naturally wary stoking of expectations of yuan appreciation, for fear of attracting hot money. Still, investors should probably pay the premier more attention. The government work report, effectively an annual mission statement, indicates that stabilising and developing exports is a bigger priority this year. In the past, the report has talked more about correcting trade imbalances. Increasing exchange rate flexibility - a goal of 2008 - was missing from this year’s report.
The People's Bank of China wants to make the yuan more flexible in the long run. But it doesn't have a final say within the government on yuan policy. Those decisions are made at the state council level, which balances the needs of other government bodies such as the Ministry of Commerce, which cares more about exports. Indeed, the commerce minister poured a little cold water on the central bank governor's remarks by saying that yuan reform would be in a gradual and controlled manner.
The best way to interpret the conflicting signals is to assume that Beijing has yet to form a consensus on the yuan. That in itself suggests any policy of currency appreciation is still some way off. Even the governor himself wasn't so clear about the timing. He said the currency’s peg to the dollar in the past year was part of China's special policy to deal with the crisis, without detailing what would constitute a satisfactory recovery. Meanwhile, Premier Wen has said 2010 will be the most “complicated” year. It is hard to believe that Beijing will rush to yuan changes before the outlook is clearer.
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