Rumours on revaluation of renm

By Richard McGregor in Beijing
Published: April 29 2005 14:46 | Last updated: April 29 2005 19:26

China's currency traded briefly outside its tightly controlled band on Friday, triggering a renewed wave of speculation that the government was preparing to allow a long-expected revaluation.


The unexpected price move followed weeks of international pressure on China to allow the renminbi to appreciate. But the People's Bank of China, the central bank, said it had made no decision to change its exchange rate policy.

A spokesman blamed “technical problems”. But some dealers speculated Beijing had allowed the renminbi to appreciate as a “dry run” to see how far and fast it might rise.

Traders said the renminbi, pegged to the US dollar for a decade, was briefly in the market at a rate of Rmb8.2700 to the dollar, outside the usual band of 8.2760 to 8.2800.

Asian currencies rose sharply, with the yen climbing 1.3 per cent to a one-month high of Y104.76 to the dollar and 1.1 per cent to a two-month high of Y135.30 against the euro. The dollar also fell against the euro and sterling.

Traders could not say whether the State Administration for Foreign Exchange, the government agency that handles currency trades, conducted any business at the higher rate.

Frank Gong, a strategist with JP Morgan in Hong Kong, said he would not be surprised to see some kind of announcement from the PBoC on currency over China's week-long May holidays, which start on Saturday. “But the point is that they are ready to do it and could move at any time.” He added that the higher rate remained on trading screens for up to 20 minutes, a sign the authorities may have been testing the market “to see how much ammunition they may need to keep everything under control”.

Beijing has been sending strong signals in recent weeks that it has completed all the technical preparations necessary to remove the US dollar peg and allow greater flexibility. But the government has also stuck to its policy of not commenting on any possible timetable for a change.

The stakes have been raised by the US Senate's decision to consider in July a bill that would slap a 27.5 per cent tariff on all Chinese exports to the US unless Beijing revalued its currency within six months.

However, President George W. Bush would be expected to veto legislation in violation of World Trade Organisation rules.

Zhou Xiaochuan, the central bank governor, said last week that China might accelerate its timetable for a more flexible rate in response to growing international pressure, but some analysts suggest the US move could backfire.

“The move is foolish because the renminbi-US dollar peg does not contribute significantly to the US current account deficit, and counter-productive because heightened foreign pressure will only make it more difficult for Beijing to adopt a more flexible exchange rate mechanism,” said Andy Rothman, chief China strategist for CLSA, the securities house.