Modest widening of the band

Others, however, believe a revaluation could arrive scene fairly soon.

“We think the best window of opportunity in the next 12 to 18 months is the first half of 2005,” says Kathleen Stephansen, director of global economic research at Credit Suisse First Boston.

There are two major ways the Chinese could revalue their currency. The first is to create a currency basket target or to simply create a valuation band for the renminbi to fluctuate in vs. the dollar. Because of “technical difficulties” surrounding a currency basket target, most analysts believe the more likely scenario would be to create a 3- to 5-percent band for the renminbi to floatin.

If this were to occur, it would most likely arrive in the form of an announcement from the Chinese government. One morning, currency traders would simply awaken to the news that a band had been created. The initial announcement, of course, would likely create at least an initial volatility surge in the global forex market. Stephansen does concede, however, that a revaluation of this nature “won’t mean a great deal. Appreciation will be relatively small.”

Bob Lynch, currency analyst at BNP Paribas in New York, called the odds 70 to 30 that a revaluation would take place in the first half of 2005, and John Rothsfield, currency strategist at Bank of America, agrees.

“In our view, we think they will give in and do a reval in the first half,” he says. “We think it will most likely be a first step.”

Bank of America expects a modest band to form around the renminbi/dollar, which would allow the renminbi to appreciate to the 8.03/dollar area.

Nonetheless, Rothsfield also admits that a 3-percent band “would pretty much be symbolic. It wouldn’t have much of an economic impact.”

However, he believes “China is buying into the idea they need to bear some of the burden to keep the global situation stable, in relation to the dollar’s losses vs. the Euro.”

Alan Ruskin, research director at 4Cast Inc., is another analyst who believes in the possibility of a nearterm revaluation.

“At some point in the first half of this year, we will get some kind of adjustment,” he says. “China will at some stage adjust the exchange rate moderately.”

He believes a 5- to 10-percent band around the dollar would be the most likely scenario. While such a move “would open the door to Asian currency flexibility, an adjustment [of that type] would be too small to make a difference. “It will usher in a new era,” he concludes. “But, I don’t think that new era will start with a bang.”