Hanke: It would be 'foolish' to revalue yuan (bloomberg) Updated: 2005-05-20 14:43 China would be "foolish" to let the yuan
strengthen, said Steve Hanke, an economics professor at Johns Hopkins
University. Failure to do so may lead to a trade war with the U.S., according to
Goldman Sachs Group Inc.
Steve H. Hanke is a
professor of Applied Economics at the Johns Hopkins University in
Baltimore. He said it would be foolish if China revalues its currency
yuan. [cato.org] | "There is no way China is going to abandon" the yuan's peg to the dollar,
said Hanke, who has advised governments from Indonesia to Argentina on currency
policy. ``China would be foolish to consider revaluing,'' he said in an
interview in Washington May 19.
China is under pressure from the Bush administration to ease the fixed
exchange rate of the yuan, which has been pegged at about 8.3 to the dollar for
a decade. The Commerce Department on May 18 sided with petitions from U.S.
textile companies to cap imports of Chinese clothing and yarn, a day after the
Treasury Department said China risks being branded a currency manipulator.
Hanke is in the minority. Treasury Secretary John Snow, Federal Reserve
Chairman Alan Greenspan, Japanese Vice Finance Minister Hiroshi Watanabe and
banks including Goldman, Deutsche Bank AG and UBS AG all say China is preparing
to alter course.
"The probability of them doing nothing is small, but it's probably risen
slightly," Jim O'Neill, head of global economic research at Goldman, said in an
interview in London yesterday. "It would be a dangerous path because by the end
of the year we'd have trade sanctions."
Sovereign Right
Premier Wen Jiabao said China won't bow to pressure from foreign countries to
revalue the yuan and U.S. moves to block Chinese textile imports may damage
relations, state news agency Xinhua reported on May 16. The exchange rate "is
the sovereign right of China," Wen said.
Wen, President Hu Jintao and People's Bank of China Governor Zhou Xiaochuan
are among Chinese officials who have said China will make its exchange rate more
flexible without being specific or indicating a timetable.
"We should listen to what the premier, Wen, has to say," said O'Neill, who
has predicted for at least a year that China may ease the yuan peg at any time.
"My guess is that if it were up to the PBOC, China would have moved to a more
flexible currency some time ago."
Traders increased bets China will let its currency appreciate within a year.
The yuan would gain to 7.8220 against the dollar in a year if freely traded from
the pegged rate of 8.2770, a gain of 5.8 percent, based on the forward contracts
as of 12:35 p.m. in Hong Kong.
Hong Kong Ceiling
The contracts allow investors to bet on the value of a currency that isn't
fully convertible or hedge investments denominated in it.
Wagers on an appreciation increased yesterday after the Hong Kong Monetary
Authority said on May 18 it will limit gains in its currency. The ceiling is
aimed at curbing speculative purchases of China-related assets by investors
betting their investment will gain should China revalue the yuan.
Such speculation is misplaced, said 62-year-old Hanke, who advised former
Indonesian president Suharto when the ex-general considered pegging the rupiah
to the dollar in 1998. Suharto quit in May of that year during Indonesia's worst
recession.
Letting the yuan appreciate may curb China's exports and spark deflation,
said Hanke, who is based in Baltimore.
Goldman's Prediction
Should China revalue the yuan by 25 percent, it would lead to 20 percent
deflation, or declining prices, Hanke said. "Non-performing loans would just
explode," he said. ``You would have a real crisis on your hands in China.
They're aware of this, so I don't think they'll change.''
Goldman's O'Neill said the currency is undervalued by about 10.5 percent.
"Anywhere from 10 to 30 percent is where most credible estimates of yuan
undervaluation lie," he said. The firm predicts China will allow the yuan to
fluctuate by about 5 percent, compared with the current 0.3 percent.
Hanke helped advise Argentina to peg its peso one-to-one with the dollar in
1991. A decade later, Hanke said the government had tinkered with the system so
much it no longer worked as intended.
Argentina defaulted in 2001 after borrowing more on international debt
markets in the 1990s than any other developing nation to finance higher
spending.
After the default, Argentina gave up its one-to-one currency link, leading to
a 70 percent drop in the peso against the dollar and causing the economy to
shrink 11 percent, its biggest contraction on record.
|