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China seen revaluing yuan 5-10 pct

Several other foreign economists have in recent weeks predicted that China will revalue the yuan imminently, bucking the consensus view that the world’s third-largest economy will allow only gradual currency appreciation.

With his forecast of a 5-10 percent rise, SocGen’s Maguire is at the front of this bullish pack.

“The call is not that aggressive in terms of where we have been or where we are likely to end up. It is how we get there that is the surprising or unorthodox part of the call,” he told Reuters in a telephone interview from his Hong Kong office.

The yuan had been appreciating at a pace of about 7 percent a year versus the dollar when Beijing halted its climb in mid-2008 to cushion the blow from the global financial crisis. A large revaluation now would simply bring the currency back up to where it would have risen had it not been re-pegged, Maguire said.

He thinks the government will freeze the yuan for 18 to 36 months after announcing the steep rise.

“What we are saying is that the currency is going to be moved in a one-off revaluation of between 5 and 10 percent and then Beijing will be able to make a credible commitment that exchange rate policy will remain unchanged for an extended period of time,” he said.

For alternative scenarios of how China might — or might not — change the yuan’s value, double-click on:

Betting on yuan revaluation

Offshore yuan forwards are currently pricing in a 2.7 percent appreciation against the dollar over the next year, while a Reuters poll conducted last month forecast a 3 percent rise by the end of this year.

Betting on a stronger yuan via non-deliverable forward (NDF) contracts is a simple way to play the revaluation view.

“They are very much a buy at the moment. The NDFs have consistently got it wrong on the outlook. Whenever they are pricing in no change is when Beijing moves,” Maguire said.

Markets may initially shudder at a surprise revaluation, viewing it as a policy mistake. “But generally it would be very positive for the currencies and markets of anyone who is selling to China — so, at the moment, Korea, Taiwan, Australia, Japan,” he said.

Many in the market have assumed that China will want to see several consecutive months of strong exports before allowing the yuan to resume gradual appreciation.

But moving in one fell swoop is the only solution to China’s exchange rate quandary, Maguire said. It needs a stronger yuan as its economy surges but also needs a way to negate anticipation of a stronger yuan and the attendant speculative inflows.

“Practically every man and his dog will be betting on the fact that the yuan will be appreciating by probably more than the return you are likely to get on developed economy bonds or equity markets over the next one to two years,” he said.

A sufficiently large revaluation would convince markets that China would not return to the gradual appreciation implemented over three years after an initial 2.1 percent rise in July 2005.

A move could well come in April or May when the country wraps up negotiations with international iron ore suppliers and sees just how expensive its import bill will be, he said.

Conventional wisdom is that China is reluctant to push through steep yuan appreciation for fear of battering the very exporters that it has tried so hard to shield.

“It is not the price of China’s exports that is the problem. It is the demand for them,” Maguire said. “Appreciation of the yuan actually benefits, because the impact of cheapening imports is greater than the export loss from the price effect.”