China May Adjust Yuan Value This Month, RBC Says (Update2)

(Adds comment from Deutsche Bank in fourth paragraph.)

By James Regan and Ben Levisohn

May 12 (Bloomberg) -- China may relax the yuan’s peg to dollar this month to head off criticism of its currency policy during May 24-25 talks with the U.S. and help tame inflation, according to Royal Bank of Canada and Wells Fargo & Co.

“The issue of the exchange rate will overshadow the entire event and threaten to damage bilateral relations” if the yuan is still pegged, Brian Jackson, a Hong Kong-based emerging- market strategist at Royal Bank of Canada, wrote in a research note received today via e-mail.

A “potential window” for a yuan adjustment is late May or early June, around the time of the U.S.-China Strategic and Economic Dialogue in Beijing or when Group of 20 finance ministers meet June 4-5 in Busan, South Korea, Nick Bennenbroek, head of currency strategy at Wells Fargo in New York, wrote in a note yesterday. Another possibility is before the G-20 heads of state meeting in Toronto on June 26-27, according to Deutsche Bank AG.      “It’s a good opportunity for China to act on currency reform before the G-20 meeting,” Ma Jun, Deutsche Bank’s Hong Kong-based Greater China chief economist, said in an interview today. “It’s a good opportunity for China to demonstrate its global responsibility.”

China halted the currency’s 21 percent, three-year advance against the dollar in July 2008 to help exporters weather a global recession and has since kept the exchange rate at about 6.83. U.S. Treasury Secretary Timothy F. Geithner last month delayed a report that may have branded China a currency manipulator, giving the nation more time to relax yuan controls without the risk of punitive tariffs.

Predicted Gains

Twelve-month non-deliverable yuan forwards traded at 6.6925 per dollar as of 1:26 p.m. in Hong Kong, reflecting bets the currency will strengthen 2 percent from the spot rate of 6.8275, according to data compiled by Bloomberg. Wells Fargo’s Bennenbroek predicts the currency will appreciate 6.4 percent to 6.42 in that time.

Trade and inflation data released this week “give the Chinese leadership the ability to portray such a move as a response to domestic economic conditions,” according to RBC’s Jackson.

China’s consumer prices rose 2.8 percent from a year earlier in April, the fastest pace in 18 months, the statistics bureau reported yesterday. Exports rose 30.5 percent from a year earlier, climbing for a fifth month, official figures show.

The yuan will begin to appreciate before the end of June on inflationary pressures, according to Commonwealth Bank of Australia, the country’s largest lender.

“We are more bullish about a weakening of the dollar against the yuan than the forward market,” Joseph Capurso, a Sydney-based currency strategist at the bank, wrote in a note today. The yuan’s gains will be “modest at first” and reach 6.75 by the end of the year and 6.42 by the end of 2011, Capurso wrote.

--With assistance from Bob Chen in Hong Kong. Editors: James Regan, Sandy Hendry

To contact the reporters on this story: James Regan in Hong Kong This e-mail address is being protected from spambots. You need JavaScript enabled to view it ; Ben Levisohn in New York at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

To contact the editor responsible for this story: Sandy Hendry at This e-mail address is being protected from spambots. You need JavaScript enabled to view it