Goldman's O'Neill Says 'Something Brewing' in China on Currency

Goldman Sachs Chief Economist Jim O'Neill said China may be poised to let its currency strengthen as much as 5% to slow the world's fastest growing major economy.

"I have a strong opinion that they're close to moving the exchange rate," O'Neill said in a telephone interview after China's central bank told lenders on Feb. 12 to set aside larger reserves. "Something's brewing. It could happen anytime."

Chinese policymakers are seeking to restrain credit growth after their economy grew the fastest since 2007 in the fourth quarter. Banks extended 19% of this year's 7.5 trillion yuan ($1.1 trillion) lending target in January as property prices climbed the most in 21 months.

Officials in Beijing have resisted allowing gains in the yuan, having controlled its value since July 2008 after it strengthened 21% against the dollar in the previous three years. The status quo has drawn criticism from foreign policymakers who say keeping the currency undervalued has handed China's exporters an advantage and inflated asset bubbles.

O'Neill, who coined the term "BRICs" in 2001, anticipating the boom in the emerging economies of Brazil, Russia, India and China, said China may allow the yuan to rise as much as 5% in a one-off revaluation and to then trade within a bigger band or against a larger basket of currencies. That would help counter international pressure, he said.

"They need to do something to slow the economy down and deal with the inflation consequences," said O'Neill, who forecasts the Chinese economy is currently growing between 12% and 14% and will expand 11.4% over the year. "The more they do—and the sooner—the better."

The World Bank predicts China's economy will grow 9% in 2010, faster than global growth of 2.7%. The government said last month the 2009 expansion was 8.7%.Goldman Sachs Chief Economist Jim O'Neill said China may be poised to let its currency strengthen as much as 5% to slow the world's fastest growing major economy.

"I have a strong opinion that they're close to moving the exchange rate," O'Neill said in a telephone interview after China's central bank told lenders on Feb. 12 to set aside larger reserves. "Something's brewing. It could happen anytime."

Chinese policymakers are seeking to restrain credit growth after their economy grew the fastest since 2007 in the fourth quarter. Banks extended 19% of this year's 7.5 trillion yuan ($1.1 trillion) lending target in January as property prices climbed the most in 21 months.

Officials in Beijing have resisted allowing gains in the yuan, having controlled its value since July 2008 after it strengthened 21% against the dollar in the previous three years. The status quo has drawn criticism from foreign policymakers who say keeping the currency undervalued has handed China's exporters an advantage and inflated asset bubbles.

O'Neill, who coined the term "BRICs" in 2001, anticipating the boom in the emerging economies of Brazil, Russia, India and China, said China may allow the yuan to rise as much as 5% in a one-off revaluation and to then trade within a bigger band or against a larger basket of currencies. That would help counter international pressure, he said.

"They need to do something to slow the economy down and deal with the inflation consequences," said O'Neill, who forecasts the Chinese economy is currently growing between 12% and 14% and will expand 11.4% over the year. "The more they do—and the sooner—the better."

The World Bank predicts China's economy will grow 9% in 2010, faster than global growth of 2.7%. The government said last month the 2009 expansion was 8.7%.