Foreign exchange policy reform may be announced soon, say analysts

BEIJING - The trade surplus for May is expected to far exceed the $1.68 billion mark of April, triggering speculation that an impending reform of the foreign exchange policy is on the cards.

Economists said the reforms are likely to coincide with the forthcoming G20 summit on June 26-27 in Toronto, Canada and would be implemented on a gradual basis rather than a one-off revaluation.

China's exports grew 32 percent last month from a year earlier, compared with 30.5 percent in April, according to a report by Industrial Securities. Imports in May grew 40 percent year-on-year, compared with a 50 percent growth in April. The brokerage anticipates that the trade surplus in May is likely to be around $11.5 billion.

"With the surplus getting bigger, the currency revaluation is likely to be implemented most likely around the G20 Summit," said Dong Xian'an, chief economist at Industrial Securities Shanghai.

The expanding trade surplus and accelerated export growth, are however, well within the expectations of economists.

Standard Chartered expects China's exports and imports in May to grow by 34 and 45 percent respectively and the surplus at around $9.6 billion.

The Customs is expected to issue the May trade figures on Thursday.

In March, China posted its first monthly trade deficit in the past five years, but was soon followed by a small surplus in April. Concerns about the trade deficit and the likely impact of the European debt crisis on China's exports and the economy have provided fodder for the government to delay currency revaluation plans in the last two months.

"The trade deficit is only momentary and exports growth will be stronger than expected and supported by return of price inflation in exports by mid-2010. We expect China will reform its exchange rate regime very soon", Sun Mingchun, an economist with Nomura Global Economics, said in a report.

President Hu Jintao said China will steadily push forward the reform of the foreign exchange rate mechanism, under the principles of independent decision-making, controllability and gradual progress at the opening ceremony of the recent China-US Strategic and Economic Dialogue. That was widely seen as a signal that the nation would undertake the reforms soon.

"Something has to be done on the currency, and the International Monetary Fund (IMF) still believes that the renminbi is substantially undervalued," IMF President Dominique Strauss-Kahn said recently.

"If there are indications that the European debt crisis will not deteriorate, we expect the Chinese government to de-peg its currency from the US dollar during the G20 meet in Toronto," said Yan Jinny, an economist from Standard Chartered Shanghai. The yuan appreciation is expected to be one of the most important discussion items at the Summit.

"We think China is likely to focus on reforming the foreign exchange regime and later consider a gradual appreciation of the renminbi rather than implement a one-off revaluation," said Sun from Nomura.

Boris Cournede, chief economist with the Organization for Economic Cooperation and Development, has similar views. "China's exchange regime should have greater flexibility and allow a gradual appreciation of the yuan against a basket of currencies instead of the dollar in the long term. It has to be gradual."

Wang Bo and Lan Lan contributed to the story.

China Daily

(China Daily 06/10/2010 page13)