Yuan and Dollar Exchange Rate

Quoted in toto from C-Biz news:

Beijing – Less capital control could trigger outflow of hard currency
savings into overseas investments. That is what US analysts expect China
might do, said Reuters on Thursday.

Bank of America currency analyst Frank Gong expects China to ease
some capital restrictions. The move could allow China to channel some of
the US$150 billion in hard currency deposits and US$ 360 billion in
foreign reserves into overseas investments. Hong Kong could be used as
intermediary, reported Reuters.

"All this money is sitting in China's banking system owing close to
zero interest rates,” he said in a recent research note.

Especially the US urge China to have a stronger Yuan to compensate
China's wide trade surplus and huge foreign-investment inflows. Yet,
despite lots of outside pressure on China to revaluate its currency
policy makers and the People’s Bank of China think the Yuan is not ripe
for substantial appreciation.

Chinese economists consider that the benefits of keeping the Yuan as
it is outweigh thedisadvantages. If the Yuan would revaluate there would
be a slower growth in the country's foreign-exchange reserves. Moreover,
Chinese officials fear that it could hit exports and foreign direct
investment and ultimately job creation. Besides the construction and
property development sector, many new jobs are presently created by
Chinese export companies and foreign-invested ones, said ChinaBiz last
week.

No Yuan revaluation but, according to Gong, local policy-makers have
intensified their call for some degree of foreign exchange reform.

Gong interprets the situation as such that China would change its
capital controls policy sooner than expected to allow domestic companies
and institutions to invest overseas.

Using Hog Kong as intermediary "can help Hong Kong out in a more
material way than the CEPA (Closer Economic Partnership Arrangement).
…..and, it can ease the Yuan
appreciation pressure," Gong said.

Mainland China signed the CEPA agreement with Hong Kong last weekend
in the attempt to provide Hong Kong businesses greater access to the
Mainland China market. But the US analyst is sceptical whether the
agreement would boost China’s economy while market access is still
limited for other major trading partners, said Reuters.

China’s Yuan is pegged to the US dollar at 8.27 Yuan. Overseas
analysts, mainly Japanese and US, consistently promote a wider
flexibility band. With a wider band export would increase. Demand for
Yuan from exporters forced to repatriate earnings to state-run banks is
likely to lead to an appreciation within the more flexible trading
regime.

When it comes to hard currency surplus China cut this week the
one-year benchmark US deposit rate by 0.25 points to 0.5625 per cent,
further widening the margin on the one-year Yuan deposit rate of 1.98
per cent. Moreover, a State Administration of Foreign Exchange official
said that China is considering proposals to allow limited access by
local companies to overseas bond markets.

Considering a Qualified Domestic Institutional Investor scheme to
allow certified companies access to offshore equity markets particularly
through Hong Kong is also expected among fields’ experts.

Debates on whether the Chinese currency would be determined by market
rather than by strict money policy have gained great attention in the
past few years. At the present moment it seems to be more actual than
ever. Recently US Treasury Secretary John Snow expressed a clear wish to
see changes.