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Roubini Says China Forex Move Could Thwart US Hopes

(Source: Reuters)

China’s decision to move away from its currency peg might mean that the yuan would weaken against the dollar instead of strengthening as Washington wants, Nouriel Roubini, one of Wall Street’s most closely followed economists, said on Saturday.

China said on Saturday it would gradually make the yuan more flexible after pegging it to the dollar for nearly two years, a move that the US government and others around the world have long been calling for.

“This is the first significant signal in years of a change in Chinese currency policy,” Roubini, best known for having predicted the US housing meltdown, told Reuters.

But it remains to be seen how China would put the new system into practice, including the composition of a basket of currencies that Beijing will use as a reference point for the yuan ‒ also known as the renminbi ‒ and the base date for that basket, he said in an e-mail.

“Since they have not changed the previous range for the band ‒ plus or minus 0.5 per cent ‒ most likely on Monday China will
allow the renminbi versus US dollar to move,” said Roubini.

The yuan has risen sharply in recent months against the euro, which sank over Europe’s debt problems, so a stronger yuan could not be taken for granted, Roubini said. If the euro were to continue to depreciate, “the renminbi would have to be allowed to depreciate relative to the dollar, a paradoxical outcome,” he added.

Roubini’s comments echoed those of an adviser to China’s central bank on Saturday. Li Daokui, an academic adviser to the monetary policy committee of the People’s Bank of China, told Reuters in Beijing that the yuan could depreciate against the dollar if the euro falls sharply against the US currency.

Roubini, like other analysts, said a major strengthening of the yuan looked unlikely.

“Even if the Chinese were to allow a gradual renminbi appre- ciation relative to the US dollar, the size of such appreciation would be modest over the next year, not more than 3 or 4 per cent as the trade surplus has shrunk, growth is likely to slow down on China and labour unrest remains of concern to the Chinese.”

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