Easing of China rifts to pave way for yuan move

(Reuters) - Policy wrangling over the yuan between China's central bank and its commerce ministry has grabbed the spotlight, but the two factions are in fact closer than in the run-up to the currency's landmark 2005 revaluation.

Analysts say that means it will be easier for them to reach a compromise, which will be key for building a top-level consensus on the way forward, presumably entailing a resumption of gradual yuan appreciation that could start as early as this quarter.

An announcement on Thursday that President Hu Jintao will attend a nuclear security summit in Washington on April 12-13 could smooth the way to a currency shift, some believe.

According to this line of thinking, Hu would not have agreed to the visit unless he had been privately assured that China would not lose face by being branded a currency manipulator in a U.S. Treasury report due on April 15.

"This shows that China and United States are unlikely to be confrontational on currency and trade issues," said Wensheng Peng, China economist at Barclays Capital in Hong Kong.

Even a delay to the U.S. Treasury report would open a window of opportunity for China to move on the yuan. President Barack Obama called this week for a positive relationship with Beijing.

"Any lessening of Sino-U.S. trade tensions ostensibly would allow China to move ahead with granting a resumption of flexibility for the yuan," said Emmanuel Ng, a currency strategist at OCBC Bank in Singapore.


Still, building an internal consensus in Beijing may take time. Any indecision could be costly if the yuan's exchange rate becomes a hot political issue in the run-up to mid-term elections in the United States in November.

The latest edition of Caijing magazine cited unidentified official sources as saying that Beijing was studying the option of dropping the yuan's peg, in place since July 2008 near 6.83 per dollar, as soon as this month.

"There are still some differences, but the People's Bank of China, the Finance Ministry and Commerce Ministry have formed an important consensus on yuan exchange rate reforms," it said.

It should be possible to heal the rift as the central bank simply wants the yuan to resume its gradual appreciation, rather than demanding another one-off revaluation as in July 2005.

Qing Wang, China economist at Morgan Stanley, believes the resistance to a strengthening of the yuan will fade as data shows further recovery in exports and higher inflation.

"As a major economy, it's impossible for China to stick to the fixed currency," said Wang, who expects a policy shift, including a small revaluation, as early as June.

PBOC chief Zhou Xiaochuan has described the yuan's stability as a "special policy" to respond to the global credit crunch.




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