No Appreciation of the Yuan For the Time Being

Hong Kong’s and China’s stock markets surged simultaneously on Tuesday morning because of a sudden financial meeting in Beijing.

The possible government announcement regarding the appreciation of the Chinese yuan hit the stock markets. The issue was brought up at the G7 meeting last week.

Stock prices soared from the opening spurred by the expectation that the asset value of Chinese corporations would increase if the yuan appreciates.

However, Chinese Prime Minister Wen Jiabao threw a cold blanket over the buoyant markets with his opening remarks at the meeting.

“We will gradually improve the yuan exchange-rate system,” said the Prime Minister. “At this moment, we need to stabilize the rate in a reasonable and balanced manner.” His remarks clearly indicated no immediate changes in the exchange-rate.

Upon his comment, the stock prices went into free fall.

The prime minister’s remarks are in line with those of the Chinese central bank, which said on Monday that the yuan might appreciate by five percent next month at the earliest.

Despite denials by the authorities, however, the markets are taking the appreciation of the yuan as settled. The only remaining issue is the timing.

Trade imbalances between the U.S. and China are getting worse. Moreover, China is facing excessive investments as authorities released the yuan into the markets to absorb increasing foreign capitals coming from rising exports, investments, and hot money.

Experts project the yuan will appreciate in June or July, when Chinese export profits decrease due to a speculated decline in the U.S. dollar, to which the yuan is pegged.

Yoo-Sung Hwang yshwang@donga.com