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China May Permit RMB Appreciation Early 2010

Dec. 16 – Stephen Jen at BlueGold Capital Management the former global head of currency research at Morgan Stanley in London, has written in a research note to clients that China’s currency may be allowed to appreciate in April

He writes: “China may allow the yuan to appreciate by April as exports recover, inflation creeps up and international criticism mounts. At the current pace of the global recovery, I suspect by next spring Beijing will be in a position to consider allowing the RMB to trade more flexibly.”
The renminbi is currently at RMB6.82 to a dollar. China’s policy makers have kept the currency at about RMB6.83 per dollar since July 2008 to help Chinese exports weather the global recession after allowing it to appreciate 21 percent against the U.S. currency in the previous three years.

The currency’s de facto link to the weakening dollar has pushed the Chinese currency down 8 percent versus the Euro over the past year, adding to pressure from China’s export competitors to let the yuan appreciate.

By pegging the renminbi to the dollar, China has essentially adopted the U.S. Federal Reserve’s monetary policy, according to Jen. The central bank cut its target rate to a record-low range of zero to 0.25 percent in December 2008. “China wants to gain greater monetary independence from the Fed,” Jen wrote. “I suspect the RMB could be allowed to trade stronger as early as next spring, before the Fed tightens.”

Once Beijing starts to let the currency appreciate, it may abandon the policy in force from 2005 to 2008, when the renminbi rose against the dollar steadily. That policy encouraged speculative investment inflows into the country, and worsened inflation. Jen writes that China may allow the renminbi to “crawl” against a basket of currencies within a pre-set band, similar to the regime adopted in Singapore.