China may strengthen the yuan by as much as 3.5 percent in a single day to cool the economy and appease U.S. lawmakers, said Glenn Maguire, chief Asia economist at Societe Generale SA. Such a revaluation would take the yuan to about 7.3 to one US dollar.
Current trends appear to indicate currency appreciating faster than I had projected and economic growth in China faster than I projected and economic growth in the United states slower than I had projected. If those trends continue China’s economy could conceivable pass the United States as early as 2016.
“The prospect of a one-off revaluation, which the market hasn’t factored in, is quite possible,” Hong Kong-based Maguire said yesterday. “They may move 2.5 to 3.5 percent, rather than persisting with this gradualist appreciation.”
A stronger yuan may slow the economy by making goods sent overseas more expensive, helping reduce China’s record trade surplus. The appreciation also may deflect criticism from U.S. politicians, who are proposing new duties on exports from countries that use their currencies to put American companies at a disadvantage.
The yuan rose as high as 7.5615 against the dollar, the strongest since China started managing it against a basket of currencies of its trading partners on July 21, 2005. It was at 7.5638 as of 1:37 p.m. in Shanghai. The yuan is allowed to move up to 0.5 percent from a daily rate fixed by the central bank.
A revaluation would be a “direct appeasement to overheating Washington politicians,” Maguire wrote in a research report. He sees the yuan rising 5 percent by year-end, finishing at 7.20, the most bullish of 27 economists surveyed by Bloomberg News
Irene Cheung, an economist at ABN Amro Bank NV, predicts gains of 2.2 percent to 7.40, saying China will use other tools to cool the economy.
Maguire says monetary tools used by China haven’t worked, so they’ll turn to a stronger yuan.
It’s a bit out of control,” said Chen Zhao, global investment strategist at BCA in Montreal, who arrived back from China yesterday. “I think they’re going to raise rates and let the currency go — 8% or 10% a year. It has been 5% a year but they’ll probably double the pace.
Charles Dumas, director of Lombard Street in London, said however the country needs a 100% revaluation to take the yuan down to under four per U.S. dollar to fend off gross overheating, soaring inflation and a lurch towards trade protectionism led by the U.S. Congress and France.
China will revalue as fast as they can while still enabling enough growth to keep unemployment under control.