By  on September 16, 2005

BURGENSTOCK, Switzerland — China is likely to deflect U.S. political pressure for a sharp revaluation of the yuan and continue with its incremental approach on reform of its currency, international market experts said at a commodities conference here.

"They're under a lot of political pressure from the U.S. to revalue the…yuan," said Roy Leighton, chairman of the London-based Futures & Options Association. "They're taking their time about that and I think that's prudent and sensible because they've got to feed that gradually into their economy."

On July 21, China abandoned its decade-long fixed peg to the dollar in favor of a managed float composed by a basket of currencies, but has not revealed details as to how this basket is weighed and calculated.

The move has resulted in a 2 percent appreciation of the yuan, which is not considered sufficient in many influential U.S. industrial and political circles to help reduce the huge bilateral trade deficit, which last year reached $162 billion, and has sustained calls on the Bush administration to arm-twist Beijing to engineer a large appreciation.

"I think what the Chinese have done is to try to release a little bit of the pressure from the U.S.," said Didier Varlet, of Chicago-based Cartesia Consulting. "But at the same time, they don't want to really abandon the old way they had to run their economy. So, it's a kind of compromise under pressure."

Varlet feels China will take its time before it decides to freely float the yuan.

On Sept. 9, Gov. Zhou Xiaochuan of the People's Bank of China — the country's central bank — said in a meeting in Canada that U.S. threats to take protectionist measures against China over the exchange-rate issue, as outlined in a bill presented by Sens. Charles Schumer (D., N.Y. ) and Lindsey Graham (R., S.C.) "will not change the basic conditions and sequence of China's exchange-rate reform, but [serve] only to disturb the normal course of the reform. We will proceed from the fundamental interest and economic and social realities of China, and adopt the exchange-rate regime and exchange-rate policies that are suitable to China's specific conditions."Patrick Catania, president and chief executive officer of Chicago-based consultancy Asia West Group, believes pressure from Washington could backfire.

"The more they twist, the more they cajole, the more they pressure, the less likely are the Chinese to act," said Catania, a former senior executive vice president at the Chicago Board of Trade. "So I think there needs to be more education within the U.S. political system in what is taking place and what in fact happens should these moves take place to modify a currency's global value. There are repercussions through a full economy, and they have the right to take a step back and look…so that they know that it's going to destroy what they built to this point."

But China's robust economy, followed closely by an emerging India, and its thirst for energy and industrial commodities, which has in part fueled the latest boom in world prices for oil and other energy commodities, will continue in the short to medium term, experts believe.

"I think markets ultimately react to market fundamentals," said James Newsome, president of the New York Mercantile Exchange. "We look at the fundamentals, particularly in the energy sector. There's no short-term fix to the supply-demand imbalance that currently exists. So, it's my expectation that higher energy prices are going to be with us for quite some time."

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