Yuan's fair value debated inside and outside China

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March 30, 2010, 11:46 p.m. EDT

LOS ANGELES (MarketWatch) -- As Beijing offered contradictory views this week on whether to allow its currency to appreciate, analysts also appeared at odds over whether the Chinese unit should move higher, with some saying the yuan might even be undervalued.

China kept the yuan's central parity rate -- the daily rate that marks the center of a 1-percentage-point band limiting movement for the currency's rate against the U.S. dollar -- almost unchanged on Wednesday, at 6.8263 yuan to the dollar against 6.8264 yuan Tuesday.

After China opened its currency to a limited float in July 2005, it allowed the yuan to rise over 20% against the greenback - up until July 2008. But once the global financial crisis hit, Beijing clamped down on any further appreciation.

Whether to allow the yuan to resume its rise has become a hot topic, all the more so as some U.S. lawmakers are insisting that China be labeled a currency manipulator by the Obama administration, a move that would open it up to U.S. sanctions. The administration is due to report on whether to apply the manipulator label by the middle of next month.

LOS ANGELES (MarketWatch) -- As Beijing offered contradictory views this week on whether to allow its currency to appreciate, analysts also appeared at odds over whether the Chinese unit should move higher, with some saying the yuan might even be undervalued.

Within China, recent remarks show some difference of opinion.

Earlier this month, Chinese Premier Wen Jiabao rebutted arguments that the yuan is undervalued. See full story on Wen's comments about the yuan.

But some corners of Chinese officialdom have suggested a rise might be warranted.

Xia Bin, who was picked Monday to join the People's Bank of China's monetary policy committee was quoted in a Reuters report Tuesday as saying the yuan should be allowed to appreciate immediately.

China "should resume the pre-crisis managed floating exchange rate as quickly as possible,'' Xia was quoted as saying.

The apparent division seen in remarks from Beijing is echoed among economists.

The argument for letting the yuan rise is that such a move would counter rising inflation in China, bringing down the price of imports, both for consumers and for Chinese industry, which could then pass on the cost savings.

"Because China imports a large portion of its commodities from the rest of the world, it is likely that China could again allow the yuan to appreciate if inflation becomes perceived to be an immediate threat," said analysts at Citigroup in a recent note.

The Citi analysts said such inflation is almost a certainty, especially within the food component, which weighs heavily in China's consumer price index.

"The healthy global growth rate expected for this year and the next suggests, however, that global commodity prices, including food prices, will be rising more rapidly than the prices of services and manufactured goods," they said.

"So, barring a domestic agricultural supply miracle, China is likely to experience rising inflation, with only the threat of overcapacity in the export sectors standing in the way of double-digit inflation," the analysts said.

But not everyone is convinced.

In a recent note, analysts at BNY ConvergEx Group assembled a price index of its own to argue that the yuan might actually be overvalued

http://www.marketwatch.com/story/yuans-fair-value-debated-inside-and-outside-china-2010-03-30