Forex Reader

– By Pushpa Sathish, Staff Writer

China is sticking to its guns – the People’s Bank of China has decided to keep the yuan stable, even as the calls to let it appreciate keep pouring in. The United States has been repeatedly demanding that China let its currency rise and correct the trade imbalance – the country has a trade deficit of $229 billion with China.

The latest to join the bandwagon is Thailand; China’s dogmatic stance is hurting smaller economic nations that depend on their exports for growth, according to Thai Finance Minister Pridiyathorn Devakula. The chief of the country’s central bank imposed tight controls on the baht after it surged to a nine-year high against the US dollar following a spate of foreign investments.

The minister, who along with the Thai central bank came in for some harsh verbal treatment from internal and external investors, justified his decision as a measure to protect the small country’s economic growth prospects. He raised a very valid point – that if China and other export competitors allowed their currencies to appreciate at a similar level as the baht, these controls would not be necessary.

A visit to China by the U.S. Treasury Secretary Henry Paulson and the U.S. Federal Reserve Chairman Ben Bernanke earlier this month failed to elicit a positive response, with China saying that it would consider flexibility for its currency, but not committing itself to any schedule or deadlines.

China is slowly responding to the West’s demand to let its currency appreciate, the results of which were seen in the yuan’s strongest ever showing against the US dollar. Following the central bank’s hike in lending rates by 27 basis points, the yuan rose to 7.9642 against the dollar. Forbes reports:

On Jan 4, China launched an OTC system for the interbank foreign exchange market, allowing market participants to make currency trades on credit without the intervention of a third party. Previously it relied exclusively on an automatic price-matching system, overseen by a centralized government trading center, known as the exchange-traded market.

Hoping to quell speculation and trader bets on the rate of appreciation of the yuan, the Chinese government is allowing the currency to fluctuate. The yuan recorded a sharp decline after gaining over the past week. With the United States and other countries around the world pressing China to allow the yuan to rise, Chen Dongqi, deputy director of the government’s Institute of Macroeconomic Research, feels that local companies should be given time to adjust to the possibility of a stronger yuan, According to a report in the Shanghai Securities News, the deputy director believes that an increase of 3 to 4 percent a year is sufficient. China scrapped a peg to the dollar a year ago. Bloomberg reports:

A 1.7 percent gain since the peg ended hasn’t appeased U.S. legislators who say an artificially weak yuan has led to a flood of Chinese imports, manufacturing job losses and a record $201.6 billion trade deficit last year.

China’s central bank, the People’s Bank of China announced that it is preparing to gradually step out of the foreign exchange market. It is aiming at making the yuan exchange rate more flexible in order to boost trading. The bank said that it would continuously improve the exchange rate regime.

It will also allow the market play a fundamental role in reviving the country’s economic fortune. It seems that finally the Chinese financial authorities realized that they would have to stay out of the market to give it a free hand to operate. Then only, the forex trading will benefit the country’s economy.