Chinese yuan seen 20 per cent undervalued

HONG KONG – China’s yuan is undervalued by 20 per cent, a Reuters poll showed on Friday, highlighting the case of President Barack Obama who last week pressed Beijing to allow the currency to rise.

The poll of 33 respondents showed that China’s moves to liberalise its currency mean the yuan will be freely traded by 2020, which is the target date set by Beijing to make Shanghai an international financial centre.’It’s a policy issue,’ said Wensheng Peng, an economist at Barclays Capital in Hong Kong. ‘In the long term, as the Chinese government wants to promote the yuan as an international currency, that is a driver for liberalisation, but my guess is it will be gradual rather than a big bang.’Officials from Beijing and Washington have been sniping all week over China’s controversial currency policy as President Obama was on an official visit to the emerging global power.Outside pressure has been building on China to let the yuan rise after more than a year of having effectively pegged it to the dollar to protect exporters during the global downturn.However, market expectations for the extent of yuan appreciation have eased during Obama’s visit as China showed no intention of changing tack.Offshore benchmark dollar/yuan non-deliverable forwards implied a rise in the yuan of 3,7 per cent over one year on November 13, but that eased to a rise of 2,9 per cent as of Friday. The spot rate on Friday was 6,8282.The Reuters poll showed a median estimate that the yuan was 20 per cent undervalued, implying an exchange rate of around 5,69 per dollar, although forecasts of how much the unit was undervalued ranged from three per cent to as much as 50 per cent.Three analysts said the yuan was not cheap, including Geng Xiao, director of the Brookings-Tsinghua Centre for Public Policy in Beijing.’The exchange rate is about right, but the prices of energy, land, and natural resources are too low, while property and stocks are too high,’ he said.Two more analysts said it was ‘hard to say’ whether the yuan was trading below its fair value against the dollar. The currency has appreciated nearly 19 per cent since a one-off revaluation of 2,1 per cent in July 2005.CONVERTIBILITYBeijing has said it is committed to gradual currency liberalisation, but policymakers are wary of moving too quickly.A sharp rise in the yuan could hurt the country’s massive export sector, leading to job losses and – the biggest concern to Beijing – social unrest.Sharp appreciation could also encourage capital inflows betting on yet more appreciation that could destabilise the economy, analysts say.The Reuters poll showed that most respondents expect full convertibility of the yuan by 2020. Eight analysts said it would occur in five years.Beijing is testing wider use of the closely controlled currency. In the past year, it has allowed trade with Hong Kong to be settled in yuan offshore and it has signed a host of currency swap agreements with trading partners from Korea and Indonesia to Argentina and Belarus.Beijing has also floated the idea of the yuan as a reserve currency, leading two analysts polled to predict the yuan will be convertible within three years.David Cohen of Action Economics in Singapore and five other analysts believe it will happen within five years, while three poll respondents gave a 5-10 year timeframe.’Five years from now is a long time. Things are evolving very rapidly,’ Cohen said.Four analysts do not see full convertibility until after 2020.Much will depend on whether China can progress with structural reform and rebalance its economy away from exports.’If China’s trade surplus shrinks and domestic demand continues to increase, it would make the magnitude of appreciation more moderate than is needed right now,’ said Cohen.Full convertibility would also require reform of the domestic capital markets and, ultimately, abandoning capital controls.’Basically you’re asking the Chinese communist party to release control. It’s a big call on the politics, not the economy,’ said Diana Choyleva, a director of Lombard Street Research in London.-Nampa-Reuters