China's uphill battle to tame its fast-growing economy and curb capital inflows has raised the chances of a long-awaited yuan change this year, but rising US pressure may prove counter-productive. First-quarter economic growth was a faster-than-expected 9.5 percent on the year, driven by strong investment and surging exports, putting fresh pressure on Beijing to rein in growth.
"The strong activity data in Q1 has heightened the need for the government to tighten the financial conditions further before broad overheating pressures resurface again," said Hong Liang, an economist with Goldman Sachs Hong Kong.
"Both internal and external pressures are heating up again for a (yuan) revaluation, and we still maintain our view that the move could happen any time," she wrote in a research note.
Foreign countries, including the United States, have long argued that China's yuan, pegged at about 8.28 to the dollar, is undervalued and therefore gives Chinese exporters an unfair advantage in global markets.
Exports in the first quarter were 35 percent higher than a year earlier.
Zhu Jianfang, an economist at China Securities in Beijing, suggested a stronger yuan would help curb exports of politically sensitive products like textiles, while reducing China's energy import costs.
Zhu said he expected a currency change in the second half of 2005 if the US toned down its revaluation demands.
"I think the yuan will be adjusted, sooner or later. But the government needs to wait until things quieten down."
Chinese officials have suggested their aim is to make the yuan more responsive to market forces rather than simply push through a one-off appreciation in the currency. They have stressed the need for preconditions such as a healthier financial system and a stable economy. China's announcement on Thursday that it would inject $15 billion into Industrial and Commercial Bank of China would help prepare the banking sector for yuan flexibility, analysts said.
"But such a process takes time and it does not mean that there is no possibility of adjusting the exchange rate in the near term," said Gao Shanwen, an economist at China Everbright Securities
Analysts say the yuan would gain against the dollar under current conditions if China widened its trading band or shifted to a currency basket.
On Thursday, US Federal Reserve chief Alan Greenspan said that growing economic pressure would force China to alter its yuan policy, and the sooner that happened, the better.
But others reckon a currency move is not so pressing.
"I think China is likely to raise interest rates to cool growth, rather than adjust the exchange rate," said Wang Chuanglian, an economist at Great Wall Fund Management.
Last October the central bank raised interest rates for the first time in nine years to cool growth.
The increase followed a spate of tightening steps that have relied heavily on tough regulatory orders to restrict bank loans and new industrial projects.
Some analysts have said that a slower build-up in China's foreign exchange reserves in the first quarter indicated that upward pressure on the yuan was easing, a development that might make currency adjustments less risky.
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