Goldman Sachs Chief Economist Jim O’Neill said China may be preparing to let its currency, the yuan, strengthen as much as 5 percent to slow its economy somewhat.
“I have a strong opinion that they’re close to moving the exchange rate,” O’Neill said. “Something’s brewing. It could happen anytime.”
China’s central bank also told Chinese banks on Feb. 12 to set aside larger reserves and restrain credit growth after Chinese economy grew the fastest since 2007 in the fourth quarter of 2009.
Remember, Beijing has repegged the value of the yuan to the dollar since July 2008 after the yuan strengthened 21 percent against the dollar in the previous three years.
The value of the yuan has drawn criticism from foreign policymakers, who say keeping the currency undervalued has handed China’s exporters an advantage and inflated asset bubbles.
China’s currency appreciated substantially in 2007 till mid-2008 by 15 percent when they fought inflation.
Now, we see inflation starting to move up in China from negative numbers we saw in 2009, but still far away from the nearly 8 percent we saw in the first half of 2008.
I think that we could see a similar currency appreciation starting this year because of possible future rising inflation perception in China.
U.S. Treasury Secretary Timothy Geithner recently said he thinks it is "quite likely" that China will let its currency move.
So, will China do so?
Will they allow a one-time unpegging from the dollar or will they let the yuan gradually appreciate?
I don’t know, but if the Chinese horoscope is worth anything, then we know that 2010 — “The Year of the Tiger” — is predicted to be a tumultuous year.
Anyway, a stronger yuan will make waves, no doubt about that.
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