Is Beijing brewing something?

April 27, 2011

By George Chen
The opinions expressed are the author’s own.

There are growing signs that something is brewing in relation to China’s foreign exchange rate regime.

When Hong Kong traders returned from the Easter break, many were surprised to be told by their mainland colleagues about growing market speculation that Beijing might be planning a one-off deal to lift the value of the yuan — some say by as much as 10 percent.

Others are more cautious. They say a one-off revaluation sounds unlikely although Beijing may relax foreign exchange controls by setting new “game rules” around the upcoming Labour Day holiday in the first week of May. The Financial Times yesterday ran a nice scoop about sovereign wealth fund China Investment Corp being set to win new funds, likely $100-200 billion, as Beijing seeks to diversify its massive foreign exchange reserves, now exceeding $3 trillion.

I support the idea of further empowering CIC. If Beijing wants to reduce its exposure to U.S. debt, expanding direct investment worldwide is a very workable solution. Will Beijing make a formal statement on its ambition to boost CIC’s shopping power abroad during the Labour Day holiday?

Don’t forget we will soon have one of the most important U.S.-China summits with the annual Strategic and Economic Dialogue (S&ED) meeting in Washington on May 9-10. Of course, the yuan exchange rate will naturally be a focus of the dialogue. If CIC invests more in the United States, that may help the U.S. add more jobs. But then you may naturally think of another question — will the U.S. be happy to take so much money from China yet restrict its investment to some “boring” sectors?

Before the new S&ED meeting, Senate Majority Leader Harry Reid and other U.S. lawmakers back from a trip to Beijing said on Tuesday they had been assured that China would allow its currency to continue to rise against the U.S. dollar.

The yuan rate is now indeed a double-edge sword. Chinese leaders including Premier Wen Jiabao have repeatedly indicated at recent meetings and in state media reports that the government may consider allowing the yuan to rise to help curb rising inflation. That may well explain why the market is full of speculation about possible new yuan policy changes in the coming weeks.

Beijing does have a habit of making surprise policy announcements during holidays.

But April is almost over. It’s also the last month for Jon Huntsman as the top U.S. representative in China. He will officially leave the post of U.S. Ambassador to China at the end of April. Some speculate he may run for the 2012 U.S. Presidency. I am more persuaded by other opinions that he would have better chance by teaming up with a Republican candidate to run for vice-president.

Even if he and his presidential candidate fail, the media and public attention should be enough to allow him to aim for the White House in 2016.

Wait a minute … did I just suggest that President Barack Obama is too strong to fail? If you’ve seen Inside Job, the award-winning documentary film about the financial crisis, you may have different thoughts on Obama and his core values.

George Chen is a Reuters editor and columnist based in Hong Kong.

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