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April 29, 2011

Analyst Predict that China Is On The Brink Of A Yuan Revaluation

Societe Generale's Glenn Maguire and Wei Yao are predicting that China will make a fairly prompt move of the yuan to about 6.0 to 1 US dollar from today's 6.49 A 5% move would take the yuan to 6.17 to 6.2 and then another 2-3% would go to 5.98 to 6.0.

China’s quantitative approach to monetary tightening has almost certainly reached its limit. Between 2004 and now, the share of FX (foreign exchange) reserves sterilized by required reserves and open market operations declined from nearly 100% to around 80%. Meanwhile, the required reserve ratio was raised from 7% to an unprecedented 20.5%. Yet, China’s economic circumstance demands even more.

In Q1, liquidity added via FX reserves accounted for 40% of new broad money supply. If China were to sterilize even 80% of that, then the RRR (required reserves) would need to be set at 32%. Such a level would cripple the fluidity of the banking system.


Many other analysts are expecting China to fight inflation using yuan appreciation.

China has some room to do this because the US dollar is so low against everything else including the Euro and other currencies.



In the first quarter of this year, China's Producer Price Index (PPI) and industrial producers' purchase price index rose 7.1 percent and 10.2 percent respectively. The pressure for the raw materials price hikes transferred to down-stream sectors is mounting.

According to a research by ANZ Bank, if the RMB exchange rate against US dollar appreciated by 10 percent, the PPI would drop 3.2 percent in the mid term, and the non-food prices in the CPI basket would fall 0.64 percent.

The ANZ Bank said that China may resort to foreign exchange rate policy to curb imported inflation, including speeding up the pace of RMB appreciation and broaden the daily fluctuation band for RMB trading.

An exchange rate move to 5.8 by the end of 2011 would increase China's GDP in US dollar terms to 7.58 trillion (7.8 trillion including Hong Kong).
If the exchange rate was 6.0 then it would be 7.33 trillion (7.53 trillion with Hong Kong).

Adding 25% for an underground economy would mean that instead of 7.5 trillion it would be 9.5 trillion and 9.7 trillion with Hong Kong.

On a purchasing power parity (PPP) basis (new Penn World 7.0 statistics) China had a bigger economy than the US as of 2010. The PPP numbers suggest that China's currency is about 40-50% undervalued relative to the US dollar.

Last Projected GDP by NBF:

Year GDP(yuan) GDP growth USD/CNY China GDP China+HK US GDP  US Growth 

2010N 39.5         10.5    6.59       6.1      6.3   14.6   2    
2011 44             9.6    6.2        7.2       7.4   14.9   3.5
2012 49             8.5    5.9        8.5       8.7   15.2   4.2
2013 55             8.5    5.6        9.8      10.1   15.5   4.2
2014 60             8.5    5.3       11.4      11.7   15.7   2.7
2015 66             8.5    5.0       13.2      13.5   16     2.7
2016 73             8      4.8       15.3      15.6   16.4   2.7 
2017 80             8      4.6       17.6      17.9   16.8   2.7 Past USA
2018 87             8      4.3       20        20     17.2   3
2019 95             8      4.1       23        23     17.6   3
2020 104            7.5    3.9       27        27     18.1   3
2021 113            7.5    3.7       30        31     18.7   3
2022 122            7.5    3.5       35        35     19.2   3
2023 133            7      3.4       40        40     19.8   3
2024 143            7      3.2       45        45     20.4   3
2025 154            7      3.0       51        51     21.0   3
2026 166            7      3         55        56     21.6   3
2027 178            7      3         59        60     22.3   3
2028 192            7      3         64        64     23.0   3
2029 206            7      3         69        69     23.6   3 
2030 222            7      3         74        74     24.4   3


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