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Joseph Yam Says ‘Large’ One-Off Yuan Gain Is Unlikely

Joseph Yam, Hong Kong Monetary Authority's former head
Joseph Yam, former head of the Hong Kong Monetary Authority, speaks to the media as he arrives for a meeting as part of the Reserve Bank of Australia and Bank for International Settlement (BIS) meetings in Sydney. Photographer: Ian Waldie/Bloomberg

China is unlikely to undertake a “large” one-time appreciation of the yuan when it lets the currency move against the dollar, former Hong Kong Monetary Authority head Joseph Yam said.

Policy makers will allow flexibility “sooner or later,” with the timing dictated by economic and financial conditions rather than political events, Yam said in a speech in Singapore today. He is executive vice president of the China Society for Finance, a think tank overseen by China’s central bank.

U.S. Treasury Secretary Timothy F. Geithner said yesterday that it was in China’s interest to let the yuan “gradually move over time.” Chinese central bank adviser Li Daokui said now is the best time to adjust the exchange rate, with the European debt crisis basically over, financial news website Hexun reported today.

China has held the yuan at about 6.83 per dollar since July 2008, after a 21 percent gain over the previous three years. Geithner, who has delayed a report that could name China a currency manipulator, will take part in talks on May 24 and 25 in Beijing as part of the annual U.S.-China Strategic and Economic Dialogue.

“Contrary to market expectation, I think there is unlikely to be a large one-off appreciation of the exchange rate of the renminbi against the U.S. dollar on exit from the special policy when exchange-rate flexibility is re-introduced,” Yam said.

Waiting Game

China’s policy makers have indicated they are waiting for clearer signs of a sustained global rebound before letting the yuan gain. The nation’s central bank thrice this year ordered lenders to set aside more cash as reserves to drain excess money from the economy, while keeping benchmark interest rates unchanged.

While domestic economic conditions in the world’s most populous nation may warrant an exit from the fixed exchange rate, those in developed markets are causing “considerable concern” in China and there is need for “great caution,” Yam said.

“An exit from the special exchange-rate policy of the last 20 months will come, sooner or later, as the reality of China’s economic development dictates, but not as a solution to problems associated with the current financial crisis of the developed markets,” he said.

Investors seeking hints of the likely timing of China’s yuan exit policy should focus more on the normalization of domestic economic conditions than political pressure, Yam said.

“As far as the leadership in Beijing is concerned, six months before the mid-term election in the U.S. or the publication, or the delay in the publication, of some report on currency manipulation, or the holding of meetings of the Sino-U.S. strategic dialogue, or presidential visits overseas are not particularly relevant,” he said.

Yam was speaking at a Bank of America-Merrill Lynch conference.

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