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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. |
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