China Is ‘Highly Unlikely’ to Devalue Yuan, Yu Says

Following meetings with U.S. Treasury Secretary Henry Paulson, Chinese officials seem unlikely to allow the yuan to depreciate. Bloomberg reports:

“It is highly unlikely that China will reverse its course,” Yu Yongding said in an interview via e-mail. “The export sector can and should be helped by means other than devaluation. Why should China do something that is not in its long-term interests and whose impact in the short-run is uncertain?”

Yu, , now a senior fellow at the Chinese Academy of Social Sciences, said China should stimulate domestic demand after the world’s fourth-biggest economy grew 9 percent in the third quarter, the slowest pace since 2003. Policy makers cut interest rates by the most in 11 years and announced a $586 billion economic stimulus plan last month to spur domestic demand.

The one-year non-deliverable forwards rose 0.7 percent today, after a 3.3 percent drop on Dec. 1. The contracts showed the currency will weaken 3.5 percent to 7.1350 a dollar in a year, compared with 7.1850 at the end of last week. Forwards are agreements in which assets are bought and sold at current prices for settlement at a later time. Non-deliverable contracts are settled in dollars.

The Washington Post also reports that the U.S. government is counting on continued appreciation of the yuan in order to make U.S. goods more desirable to Chinese consumers:

The appreciation of the yuan has been one of the Bush administration’s primary goals through the U.S.-China Strategic Economic Dialogue, an annual two-day economic summit that Paulson helped create in 2006. China has responded by allowing its currency to appreciate more than 20 percent since moving to more of a market-based exchange rate in July 2005. The currency’s value is important to the United States partly as a market-opening tool, because a stronger yuan makes American goods cheaper in China, thus encouraging the Chinese to buy more of them.

“There will always be people in China that look at [Chinese exporters’ current troubles] and blame it directly on the currency appreciation and seek to roll that back. But I think the Chinese understand how important currency reform is to balanced growth in China,” Paulson told reporters at the end of the summit’s latest round.

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