Yuan 'straitjacket' risks China asset bubble

As recently as Nov. 9, People's Bank of China Governor Zhou Xiaochuan said he didn't feel much pressure to let the yuan rise, deflecting calls for an increase as exports start to recover and President Barack Obama prepares to discuss the issue in Beijing next week. China's stance risks fueling credit that's surged by US$1.3 trillion this year, according to Fred Hu at Goldman Sachs Group Inc.

China's sales of yuan to keep it fixed to the dollar contributed to a 29 percent jump in money supply, and the peg helped spur more than US$150 billion in speculative funds from overseas in the past six months, China International Capital Corp. says. Record apartment prices and a 74 percent climb in the benchmark stock index this year are prompting warnings that the policy is inflating asset prices excessively.

“If China keeps the peg, it will be powerless to prevent asset bubbles,” says Hu, Hong Kong-based Greater China chairman at Goldman Sachs, the first foreign company to underwrite a domestic Chinese bond offering. “Politicians have a mistaken fear that any appreciation in the renminbi might be harmful to the export sector.”

Investors should sell the stocks of property developers as a way to minimize the risk of a bubble ending in collapse after their share prices gained 155 percent in the past year, Morgan Stanley says.

Obama will attend the summit of the Asia Pacific Economic Cooperation forum in Singapore this weekend before traveling to China on Nov. 15. Calls for greater yuan fluctuations may further escalate when European officials including central bank President Jean-Claude Trichet visit before year-end.

U.S. Treasury Secretary Timothy Geithner Thursday hailed a commitment by Asia-Pacific ministers to flexible exchange rates even as his Chinese counterpart at a Singapore meeting said the yuan's peg contributed to the global economic recovery.

China's drive to create jobs and maintain social stability through export-led growth means politicians aren't ready to loosen controls on the currency, say Hu and Ha Jiming, chief China economist in Hong Kong at China International Capital, the first investment bank formed as a joint venture between a Chinese bank and a foreign firm.

Policy makers have kept the yuan at about 6.83 per dollar since July 2008, seeking to aid manufacturers battered by the collapse in demand abroad. The yuan advanced 21 percent in three years from July 2005, when officials loosened their controls.

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