Tight rein on China's yuan intensifies asset bubble risks
November 15, 2009
By Shamim Adam
As recently as Monday, People's Bank of China governor Zhou Xiaochuan said he didn't feel much pressure to let the yuan rise, deflecting calls for an increase as exports start to recover and US President Barack Obama prepares to discuss the issue in Beijing this week. China's stance risks adding to liquidity after credit surged by $1.3 trillion (R9.65 trillion) this year, according to Fred Hu at Goldman Sachs Group.
China's sales of yuan to keep it fixed to the dollar contributed to a 29 percent jump in money supply, and the peg helped spur more than $150 billion in speculative funds from overseas in the past six months, China International Capital Corporation says.
Record apartment prices and a 74 percent climb in the benchmark stock index this year are prompting warnings that the policy is inflating asset prices excessively.
"If China keeps the peg, it will be powerless to prevent asset bubbles," says Hu. "Politicians have a mistaken fear that any appreciation in the renminbi might be harmful to the export sector."
Investors should sell the stocks of property developers as a way to minimise the risk of a bubble ending in collapse after their share prices gained 155 percent in the past year, Morgan Stanley says.
Calls for greater yuan fluctuations may further escalate when European officials, including central bank president Jean-Claude Trichet, visit before year-end.
US Treasury secretary Timothy Geithner on Thursday hailed a commitment by Asia-Pacific ministers to flexible exchange rates even as his Chinese counterpart at a Singapore meeting said the yuan's peg had contributed to the global economic recovery.
China's drive to create jobs and maintain social stability through export-led growth means politicians aren't ready to loosen controls on the currency, says Hu and Ha Jiming, the chief China economist in Hong Kong at China International Capital, the first investment bank formed as a joint venture between a Chinese bank and a foreign firm.
President Hu Jintao said the government's focus was to expand domestic spending, "especially consumer demand".
Speaking in Singapore, ahead of the Asia Pacific Economic Co-operation (Apec) summit, he didn't mention the yuan.
Policymakers have kept the yuan at about 6.83 per dollar since July 2008, seeking to aid manufacturers battered by the collapse in demand abroad.
The yuan advanced 21 percent in three years from July 2005, when officials loosened their controls.
Goldman reiterated its three-, six- and 12-month forecasts for the yuan on Thursday to stay at 6.83 against the dollar.
The central bank said currency policy would take into account global capital flows and changes in major currencies.
Yuan forwards rose for a third day after the release, with 12-month non-deliverable contracts advancing 0.3 percent to 6.5895 a dollar on Friday. - Bloomberg
|
|
