China’s reserves requirement increase will “stoke yuan revaluation expectations” since they are part of a series of measures aimed at cooling the economy, according to UBS AG, the world’s second-biggest currency trader.
The third increase this year in the ratio of cash banks must hold in reserve, announced yesterday, won’t be sufficient to rein in inflation and asset price bubbles, Goldman Sachs Group Inc. and Royal Bank of Canada wrote in separate notes. All three banks reiterated forecasts that China will end its 21- month-old policy of keeping the yuan at around 6.83 to the dollar, designed to buffer its economy from the global recession.
Speculation that China may let its currency gain intensified last month after U.S. Treasury Secretary Timothy F. Geithner delayed a report that could name the nation am exchange-rate manipulator. China will pursue a “moderately easy” monetary policy and keep the yuan at a “stable” level to support economic growth, Finance Minister Xie Xuren said yesterday.
“Our economists believe that a second-quarter move is still on the cards,” Gareth Berry, a currency strategist at UBS in Singapore , wrote in a note today. “The next major deadline is the Sino-U.S. strategic and economic dialogue, due to be held in Beijing on May 24-25. If there is still no action or commitment on yuan revaluation by that time then tensions could resurface.”
Twelve-month non-deliverable forwards were little changed at 6.6148 per dollar as of 10:14 a.m. in Hong Kong , reflecting bets the currency will strengthen 3.2 percent from the spot rate of 6.8252, according to data compiled by Bloomberg.
Further monetary policy tightening will be required in coming months which will include higher benchmark lending rates and a stronger yuan, Goldman Sachs and RBC wrote in separate reports. Goldman Sachs retained its forecast for the yuan to appreciate 5 percent against the dollar in the next 12 months, while RBC maintained its projection for the currency to rise to 6.50 to the greenback by end of 2010.
China may allow the yuan to appreciate by June 30 to curb inflation, while avoiding a one-time jump in value that might endanger export jobs, an April 13 Bloomberg survey of analysts showed. Local financial markets are closed today for a public holiday.
The People’s Bank of China said on its website yesterday that banks’ reserve requirements will be increased by 50 basis points effective May 10. The current level is 16.5 percent for the biggest banks and 14.5 percent for smaller ones.
Geithner and Secretary of State Hillary Clinton will travel to Beijing for meetings May 24-25, the U.S. Treasury Department said on April 26. The officials will take part in the second U.S.-China Strategic and Economic Dialogue. Geithner and Clinton will meet with their counterparts, Vice Premier Wang Qishan and State Councilor Dai Bingguo.