By Michael Kitchen
As Beijing offered contradictory views this week on whether to
allow its currency to appreciate, analysts also appeared at odds
over whether the Chinese unit should move higher, with some saying
the yuan might even be undervalued.
China kept the yuan's central parity rate -- the daily rate that
marks the center of a 1-percentage-point band limiting movement for
the currency's rate against the U.S. dollar -- almost unchanged on
Wednesday, at 6.8263 yuan to the dollar against 6.8264 yuan
Tuesday.
After China opened its currency to a limited float in July 2005,
it allowed the yuan to rise over 20% against the greenback - up
until July 2008. But once the global financial crisis hit, Beijing
clamped down on any further appreciation.
Whether to allow the yuan to resume its rise has become a hot
topic, all the more so as some U.S. lawmakers are insisting that
China be labeled a currency manipulator by the Obama
administration, a move that would open it up to U.S. sanctions. The
administration is due to report on whether to apply the manipulator
label by the middle of next month.
Within China, recent remarks show some difference of
opinion.
Earlier this month, Chinese Premier Wen Jiabao rebutted
arguments that the yuan is undervalued.
But some corners of Chinese officialdom have suggested a rise
might be warranted.
Xia Bin, who was picked Monday to join the People's Bank of
China's monetary policy committee was quoted in a Reuters report
Tuesday as saying the yuan should be allowed to appreciate
immediately.
China "should resume the pre-crisis managed floating exchange
rate as quickly as possible," Xia was quoted as saying.
The apparent division seen in remarks from Beijing is echoed
among economists.
The argument for letting the yuan rise is that such a move would
counter rising inflation in China, bringing down the price of
imports, both for consumers and for Chinese industry, which could
then pass on the cost savings.
"Because China imports a large portion of its commodities from
the rest of the world, it is likely that China could again allow
the yuan to appreciate if inflation becomes perceived to be an
immediate threat," said analysts at Citigroup in a recent note.
The Citi analysts said such inflation is almost a certainty,
especially within the food component, which weighs heavily in
China's consumer price index.
"The healthy global growth rate expected for this year and the
next suggests, however, that global commodity prices, including
food prices, will be rising more rapidly than the prices of
services and manufactured goods," they said.
"So, barring a domestic agricultural supply miracle, China is
likely to experience rising inflation, with only the threat of
overcapacity in the export sectors standing in the way of
double-digit inflation," the analysts said.
But not everyone is convinced.
In a recent note, analysts at BNY ConvergEx Group assembled a
price index of its own to argue that the yuan might actually be
overvalued.
Imitating the Economist magazine's famous "Big Mac Index" --
which compared the price of the McDonald's burger around the world
to determine currencies' fair value -- the ConvergEx analysts used
hodge-podge basket of goods to judge the yuan's real worth.
Among their findings:
* A Waygu ribeye steak costs $92 in New York and $51 in
Beijing.
* A new Buick costs $27,835 in the U.S. but $18,430 in
China.
* A night at a luxury hotel in Beijing goes for $286, while the
same (St. Regis chain) hotel in the U.S. costs $429 and $695 for a
night in Washington D.C. and New York, respectively.
* A movie ticket in China runs $8.34 but $12.33 in New York.
* A day at Disneyland in the U.S. costs $72, while a ticket for
the Happy Valley Beijing amusement park is $23.
The only item on the ConvergEx list that was more expensive in
Beijing was wholesale pork, though there, the difference was only 1
U.S. cent.
The analysts admitted that other issues could explain some of
the discrepancy, such as a difference in standards of living and
cost structures.
But "the upshot of this analysis ... does imply that the yuan is
in fact overvalued. It is hard to tell just how much, however,"
they said.
The ConvergEx analysts added that the importance of the yuan's
value against other currencies also depends on how the Chinese
economy fares. If its currently strong performance weakens, then
the yuan's value would become much less relevant to those outside
of China.
"We are old enough to remember all the same arguments about the
Japanese yen in the 1980s and 1990s. History has not been kind to
the myth of Japanese economic superiority based on a structurally
cheap currency. Similar arguments over the yuan and the Chinese
economy's juggernaut status may well fade into a similar sunset,"
they said.
If and when the yuan does make a move, Chinese exporters will
likely be the first to feel the effect - companies such as Li &
Fung Ltd. (LFUGY) or Yue Yuen Industrial Holdings Ltd. (YUEIY). Li
& Fung supplies clothing for well-known Western outlets, such
as Kohl's and Wal-Mart, while Yue Yuen makes athletic shoes for the
likes of Adidas and Puma.
Shares of Li & Fung traded down 0.8% in late Wednesday
morning Hong Kong trading, while those of Yue Yuen were on a
trading halt for unspecified reasons.
The moves compared to a choppy market in Hong Kong, with the
benchmark Hang Seng Index flat at 21,368.0 and the
mainland-China-focused Hang Seng China Enterprises Index up 0.4% at
12,463.7.
The Shanghai Composite Index, meanwhile, was 0.3% lower at
3,119.6.
Elsewhere in Asia, Japan's Nikkei 225 Average was 0.4% higher,
the Japanese Topix was up 0.3%, South Korea's Kospi was down 0.1%
and Australia's S&P/ASX 200 was down 0.2%.