- What’s on the Horizon for the Chinese yuan?

While the early weeks of 2005 ushered in modest strengthening of the U.S. dollar vs. the Euro, a major wild card remains on the currency horizon in the form of China. Throughout 2004, amid
continuing weakness in the greenback, governments around the world pointed to the Chinese yuan’s peg to the U.S. dollar as a potentially destabilizing global economic force. A potential
revaluation of the Chinese currency vs. the dollar has long been a hot topic in the forex markets and is likely to remain so as long as the bears continue to dominate action in the buck.
While analysts and traders are divided on the likelihood of a potential revaluation for the yuan in the first half of 2005, let’s take a look at the background leading up to the current situation. What form would a revaluation take, and what could it mean for the dollar and the other majors?
Hot growth
China has exploded onto the global economic scene in recent years. With a population of nearly 1.3 billion people, China’s huge demand for raw materials as it strives to produce new goods
for its burgeoning middle class has helped support tremendous price increases in many global commodity markets. Impressive gross domestic product (GDP) numbers have rolled out of China in recent years, with most analysts believing final growth numbers came in around 9.3 percent in
2004.
Amid concerns of potential overheating late last year, the Chinese government hiked interest rates — for the first time in nine years — by 0.27 percent, bringing its benchmark lending rate to
5.58 percent. “For a while last year, everyone was worried about a [growth] crash,” says Jim Glassman, senior economist at J.P.
Morgan Chase in New York. “We don’t think those fears make sense.” While a modest slowdown is forecast for 2005, economists still expect growth in the 8.0 to 8.5 percent region for China this year. China is on a rapid growth path.
Much has been written on the hardworking nature of the Chinese, which will likely play into speculation regarding the future growth prospects of this nation.
“[The Chinese] are some of the most industrious and financially aggressive people in the world,” says Brian Dolan, director of research at Gain Capital. “A lot of them are worker bees where everyone has two jobs. That economy is not going to experience a slowdown of any consequence for many years to come.”

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