China's currency appreciation likely to be 'slow, boring' process: UBS

By Kim Young-gyo
HONG KONG, April 25 (Yonhap) -- China's currency appreciation will be a slow and
"boring" process, an analyst at Swiss financial firm UBS said Sunday, dismissing
U.S. hopes that the yuan will climb quickly against the dollar.
"It's likely to be gradual and it's likely to be a little boring actually if you
look at what (China's) policy preferences are," said Jonathan Anderson, head of
the Asia-Pacific department at UBS. "This is the economy that has complete
control over where the currency goes given their reserves and given their closed
capital accounts."
Anderson, who works at the firm's Beijing office, was speaking in Hong Kong at an
investment conference. He said he expected the Chinese yuan to begin appreciating
within the first half of this year.
"Something will happen probably this month or next month. I'd be surprised if we
go into the summer and find nothing has happened on the currency," he said.
Washington has been demanding that Beijing abandon its policy of pegging the yuan
to the U.S. dollar, which the U.S. argues artificially lowers the value of the
Chinese currency and gives its exporters an unfair advantage in overseas markets.
Since August 2008, the yuan has been pegged at around 6.8 to the dollar.
"We are getting signals from everywhere now in China that (the yuan) will move
soon," said Anderson, a long-time China expert. "They had lots of under-the-table
discussions with the U.S. -- we know this from many sources."
China will not allow the yuan rise drastically because of the lessons it has
learned since 2005, when the country instituted a "crawling peg" policy, he said.
In July 2005, China dropped its fixed exchange rate policy, but allowed the value
of the yuan to fluctuate within a specified range on a daily basis. In the three
years following, the Chinese currency appreciated in value by 21.6 percent,
seeing a massive inflow of hot money into renmenbi assets.
The amount of the money that flowed in the Chinese financial markets in search of
short-term profits is estimated to be up to $1.75 trillion during the period,
according to market experts.
"One (way) is to move a lot up-front to avoid that -- 20 to 30 percent now. The
trouble is that it may be good for China in the long-run, but it will bankrupt
the entire export sector immediately, who didn't see it coming and had a contract
price in the old price for next six months," Anderson explained. "It is not
something Chinese authorities are looking forward to, and I believe we can put
that option off the table."
"If you telegraph people 15 percent of (the currency appreciation) a year,
everybody will rush in. If you telegraph 5 to 7 percent, there will be lack of a
high interest. You will still see hot money, but not see a massive flow."
UBS has forecast a 6 percent rise of the yuan against dollar by the end of this
year and another 7 or 8 percent by next year, the analyst said.
ygkim@yna.co.kr
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