Forex Blog: Currency Trading News & Analysis.

June 6th 2005

Experts divided over Yuan revaluation

Economists seem to agree that the revaluation of the Chinese Yuan is ‘imminent.’ What they cannot seem to agree on is the nature of revaluation, although a few plausible scenarios seem to have emerged. First, a revaluation may simply entail the widening of the bands that currently constrain the Yuan’s fluctuation, which would inevitably lead to the currency’s appreciation. Another option would be to tie the Yuan to a basket of currencies, rather than to the USD by itself. The most drastic move would be for China to engineer a one-time, 30%+ revaluation of the Yuan, after which the currency would conceivably be permitted to float. However, analysts reckon China is likely to simply ‘drop’ the Yuan’s peg by 5-7% against the USD. In this way, China would placate complaining foreigners without rewarding speculators too much. Non-deliverable forward contracts, which reflect investors’ future expectations for the Yuan, currently support this slight revaluation scenario. The Economist reports:

Judging by the shadow yuan, financial markets reflect a sort of average of the divergent views, and are betting on a 6% appreciation within a year. The uncertainties come from the tension between China’s concern for stability and the risk that a small shift in the yuan would create more problems than it solved.

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Posted by Adam Kritzer | in Chinese Yuan (RMB) | No Comments »

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