Robert K. Landis: What is gold best at hedging against?

Section:

Rumours on Revaluation of Renminbi Increase

By Richard McGregor
Financial Times, London
Saturday, April 29, 2005

BEIJING -- 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 percent to
a one-month high of Y104.76 to the dollar and 1.1 percent 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 said. 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 percent 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
counterproductive 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.

* * *

A Currency Float -- For All of 20 Minutes

By Keith Bradsher
The New York Times
Saturday, April 30, 2005

http://www.nytimes.com/2005/04/30/business/worldbusiness/30yuan.html?
pagewanted=all&oref

HONG KONG, April 29 -- The Bush administration has been pressing the
Chinese government for years to allow its currency, which is pegged
to the dollar, to trade more freely. It got its wish on Friday --
but only for 20 minutes.

A freely trading Chinese yuan would probably rise in value against
the dollar, making Chinese exports to the United States more costly.
That in turn would give relief to American manufacturers battered by
low-priced Chinese goods as the American trade deficit has been
growing faster with China than with any other country. It would also
be a political victory for the Bush administration.

Until this afternoon China had ignored the demands. But as traders
drifted back to their desks from lunch in Asian financial capitals
on Friday, the yuan suddenly broke out of its prescribed trading
range. No one knows for sure if the move was deliberate or a result
of a technical glitch.

But regardless of whether it was a Chinese test of their ability to
manage a rising yuan or simply a case of the Chinese central bank
briefly failing to buy enough dollars to keep supporting the
American currency, traders noticed it and the prices for many other
currencies began to shift in response.

The yuan climbed until it took 8.270 of them to buy a dollar instead
of the usual 8.276. That difference, of only six thousandths of a
yuan, might not seem like much of a change.

But it came on the eve of a weeklong holiday in China and at a time
of intense speculation that a Chinese revaluation of the currency,
which has been fixed by Beijing against the dollar for years, might
be imminent. The brief appreciation, a hint of further rises if the
yuan were to float, was enough to roil currency markets around the
world.

The dollar fell and the euro, yen, and gold rose as investors placed
bets that if China let the yuan rise against the dollar, other
countries would also permit their currencies to appreciate against
the dollar because their exporters would no longer be so fearful of
being undercut by Chinese rivals.

Economists said it was almost impossible to discern from the swirl
of rumors on Friday whether China was on the verge of finally
allowing the tidal wave of investment flowing into the country to
push up the value of the yuan.

"I wouldn't be surprised if we woke up to an announcement this
weekend; I wouldn't be surprised if they waited until this summer,"
said Jonathan Anderson, an economist at UBS.

Traders used to seeing a flat line on their screens day after day
for the value of the yuan were especially transfixed by the brief
surge because it came the same day that a state-run newspaper, The
China Securities Journal, ran an article on its front page that
seemed to depart from previous government statements ruling out any
shift in currency policy soon.

The article asserted that China's financial system and currency
regime were finally ready for the yuan to rise, provided that the
rise was only a few percentage points.

The People's Bank of China, the central bank, issued a public denial
by mid-afternoon that it had received any formal instructions from
the country's political authorities to push the yuan to a new level.
But the brief movement of the yuan prompted some economists to say
that China may have been testing its ability to manage a small
fluctuation in the value of its currency, as a possible preparation
for managing an eventual change in the yuan's value.

Some currency traders said a more likely explanation was that a
mistake was made by a Chinese employee, who may have typed a wrong
number onto the government's official currency posting. "We
interpret it as a technical glitch, rather than an imminent
revaluation," said Steven Englander, a currency strategist at
Barclays Capital in New York.

Frank Gong, an economist at J. P. Morgan, said that the central bank
had tolerated tiny spurts in the yuan's value to 8.275 for a few
minutes over the last decade. But he said it was highly unlikely
that Chinese authorities accidentally let such a large spike in
value occur on Friday, especially at a time of intense speculation
about the future value of the yuan.

"They chose that timing to test the market," he said, adding that he
thought China might revalue during the coming holiday week.

Beijing authorities pegged the currency at 8.3 to the dollar toward
the end of the Asian financial crisis in 1998 and have since kept it
in a tight trading range around that level. China's foreign exchange
reserves soared by $200 billion last year alone as the People's Bank
of China intervened heavily in currency markets, issuing yuan and
buying dollars to keep the yuan from breaching the top of the narrow
trading range, 8.276 to the dollar.

The Bush administration has been calling with increasing
outspokenness in recent weeks for China to let the currency rise,
which would make imports cheaper in China as well as make China's
exports less competitive in the United States and other overseas
markets. European and Japanese officials have supported Washington's
position but have been less vocal.

Many economists within China, including some government economists,
have been warning that the country risks serious inflation if it
continues printing ever more yuan and exchanging them for dollars in
an effort to hold down the value of the yuan in currency markets.

The Chinese government has tried a variety of measures, with mixed
success, to buy back the yuan that it is issuing in its currency
market interventions, most notably by selling bonds to the public
and by reducing credit to the banking sector.

But political leaders in China have been leery of moving too quickly
to permit an appreciation of the currency, known either as the yuan
or the renminbi. They fear that a swift rise might lead to layoffs
at export-oriented factories and job losses in the countryside as
cheap food from the United States and elsewhere would flood in.

In interviews at the Canton Trade Fair in Guangzhou on Thursday,
executives from companies across China said that a higher yuan would
cut into their profit margins. But they differed, depending on their
industry, as to whether a stronger yuan would prompt overseas buyers
to shift their purchases to other countries.

Ma Jilin, the general manager of Zibo Shuangfeng Ceramics Co. in
Shandong Province in northeastern China, said that a 10 percent rise
in the value of the yuan -- larger than most economists expect --
would cause many restaurants and other customers to stop buying
brightly colored ceramic plates and mugs from his factory and take
their business to Malaysia or South Korea.

Wages for factory workers have risen 15 percent in the last year
because of labor shortages, and electricity prices are rising,
shipping costs are climbing, and high-quality clay is in short
supply, he added.

"If the renminbi rises, that will make it very difficult for a lot
of factories," Mr. Ma said.

But Yan Jun, the general manager of Jinxiang Bristles Industrial Co.
in Hunan Province in southern China, said that a rising yuan might
not have that much effect on overseas demand for his company's pig
bristles, used for paint brushes. In a country where pork is
practically a staple, pig bristles are so plentiful and inexpensive
that any threat comes not from other countries' pig bristles but
from synthetic bristles.

The synthetic bristles cost one-eighth as much as even the Chinese
bristles, and the main issue in the industry is whether buyers will
decide to accept the inferior quality of the synthetic materials, in
which case the value of the yuan will be irrelevant, Mr. Yan said.

Even before Friday's brief rise in the yuan, The China Securities
Journal report prompted a rise in the value of the euro and
especially the yen, with the yen climbing 1.16 percent, to 104.83 to
the dollar in New York trading.

The State Administration of Foreign Exchange, which manages the
country's currency reserves, issued a statement on Friday, outlining
some administrative changes in the handling of foreign currency
transactions within China and saying that it wanted to "provide
better conditions in the foreign exchange market." The statement
gave no specific clues about the value of the yuan.

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