Pressure, Speculation Rise on China’s Currency Stand

Like most people in China, Allen Huang will ring in the Lunar New Year next week by visiting with relatives, handing out red envelopes of money and indulging in a weeklong festival of foods. He’ll also take part in what’s become another tradition among Taiwanese here: loading up on mainland Chinese currency.

Huang plans to change $6,300 of Taiwan’s money into Chinese yuan, 10 times more than he usually does every month.

“Many of my friends are doing the same thing,” the 32-year-old business development manager said. The reason? “The yuan will be going up.”

Although the government in Beijing says it has no immediate plans to let its currency rise in value, speculation is running high among investors and economists that such a move could happen this year.

The Chinese government has kept the yuan firmly pegged to the U.S. dollar for more than a decade. As the dollar has weakened in recent years, so has the yuan -- giving China’s already booming export economy an even greater advantage, because a devalued yuan makes Chinese goods cheaper in foreign markets. Given China’s economy, the yuan would rise if allowed to float freely in global currency markets, economists say.

Blaming the artificially undervalued yuan for their mounting trade deficits with China, officials in the U.S. and Europe are intensifying demands for Beijing to let the yuan rise or at least loosen its peg to the dollar.

Those calls are expected to be renewed today and Saturday in London at the Group of 7 meeting of industrialized nations. Although not a G-7 member, China has been invited to the gathering of finance ministers and central bankers.

Pressures are also mounting from U.S. businesses and groups such as the National Assn. of Manufacturers. They are urging the Bush administration to take tougher action against China to combat what they see as unfair trade practices. American lawmakers have introduced legislation to slap tariffs on Chinese goods if Beijing maintains its currency controls.

“If we lose jobs because China outworks us, that’s just capitalism, but if we lose jobs because China’s cheating, that’s not fair,” said Sen. Lindsey Graham (R-S.C.), sponsor of a bill, with Sen. Charles D. Schumer (D-N.Y.), to penalize China for its currency policy.

China watchers say it’s unlikely that Beijing will be swayed by international pressure at the G-7 meeting. In fact, Chinese officials in recent days have reiterated that the yuan shouldn’t be blamed for global economic imbalances, and that any adjustment to its peg to the dollar would come gradually.

What’s more, the officials have said, China needs to make further progress on reforming its ailing banking system and opening up its capital markets before it can let the yuan float freely.

But with China’s economic growth continuing at a breakneck pace, many investors and analysts think a rise in the yuan is coming sooner rather than later. They predict that China will allow the yuan to appreciate around 5% this year, although not right away.

Even some voices within China, including bankers and economists, are calling for greater flexibility in the yuan’s exchange rate, which has been pegged at 8.3 to the dollar since 1994.

The timing of any yuan rise may depend at least partly on the flood of speculative investments into China, analysts say.

This surge of so-called hot money, from places such as Taiwan and Hong Kong, has been a key part of China’s economic growth. Economists estimate that $55 billion of hot money entered China in last year’s fourth quarter, fueling investments in businesses and real estate and contributing to the economy’s 9.5% growth rate last year.

Betting on a yuan rise, hot money investors have been ramping up real estate purchases. With more than a million Taiwanese living on the mainland, their investments are a prime driver of the economies of cities such as Shanghai.

“Many of my customers are planning to invest more money for Shanghai buildings and land for factories,” said Li Renyang, general manager of Kunshan-based Hanber Consulting Co. near Shanghai.

Li, who is Taiwanese, has personally invested about $200,000 in two houses in Kunshan in the last 18 months and plans to buy a property in Shanghai as soon as possible. Shanghai housing prices rose by almost 15% last year, after jumping 20% in 2003.

But if speculative activity on the yuan stays strong, Beijing may want to delay letting the currency rise. Senior Chinese officials have frequently stated that they don’t want to make a policy shift in such an environment.

China worries that a revaluation will bring another wave of hot money from speculators anticipating more currency adjustments. Or massive amounts of hot investments could flow out to realize profits, resulting in falling real estate prices or other dislocations.

China’s economy is “strong because hot money is keeping investment very strong,” said Andy Xie, chief Asia economist for Morgan Stanley in Hong Kong, who warns of a Chinese real estate bubble. “A revaluation would cause hot money to leave, and the economy will likely collapse.”

The best option, he says, is for China to raise interest rates to cool its economy and reduce speculation in the yuan.

Other economists, however, say that it’s in China’s interest to make a modest currency revaluation soon.

For one thing, they say, even a 10% boost in the yuan isn’t likely to significantly hurt many Chinese exporters because they enjoy such a big competitive edge in costs. A strengthened yuan would also enable some Chinese exporters to offset lost sales with savings from overseas purchases of materials and supplies.

Tim Condon, chief Asia economist for ING Financial Markets in Singapore, said a sharp slowdown in speculative funds also would make money management a lot easier for Beijing’s central bank. It constantly has to mop up the massive capital inflows by issuing bonds, while buying dollars and selling yuan to preserve the pegged rate.

In any event, investors continue to flood hot money into China, convinced that a yuan rise is in the cards.

Li Yixian, a Taiwanese businessman in Shanghai, said that in the last year he plowed as much as $240,000 into Shanghai real estate.

“I believe most investments in Shanghai’s property market are based on the belief of the market potential itself, not merely betting on the revaluation,” he said.

Before his property investments, Li said, those funds were in a U.S. dollar account at a Chinese bank, which paid a measly interest rate of less than 1%. (Taiwan’s dollars cannot be exchanged directly into Chinese yuan, so they’re generally first converted into U.S. dollars.)

Li said he had already changed his U.S. dollars into yuan. Now, he’s just waiting for Beijing to act.

“We all believe that the yuan will appreciate,” he said, “but no one knows when and how.”

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Cao Jun in Shanghai contributed to this report.