Is China Finally Ready To Revalue The Yuan?

One of the things I (and many others) are always saying is that China is ultra-paranoid about its economic growth. The Chinese government knows/believes it must have growth of at least eight percent a year to keep its job engine running and it knows/believes it must keep its job engine running to keep its populace happy. And China very much wants to keep its populace happy.

So virtually everything China does in the economic sphere is done with the above in mind.

But right now, China' growth is zooming along. Maybe too much. Goldman Sachs sees China growing at an 11 percent clip in 2010 "even as officials cool lending to restrain inflation and avert asset bubbles." Rumors are flying of China revaluing its currency.

The Wall Street Journal's China Real Time Report, in a post, entitled, "Take Two For a One-Off Revaluation?" sees China increasing the value of the Yuan by 5% increase:

Goldman Sachs chief economist Jim O’Neill thinks he sees it coming. He told Bloomberg News Friday that he thinks Beijing may be ready to allow the yuan to rise by as much as 5% in a one-time revaluation.

“I have a strong opinion that they’re close to moving the exchange rate,” he told Bloomberg. “Something’s brewing. It could happen anytime.”

He made the comments Friday after the People’s Bank of China ordered commercial banks to increase their reserve holdings, an economic cooling measure that came much earlier than most market watchers had anticipated.

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O’Neill is not the first to raise the prospect of a one-off revaluation.

“There’s a very urgent need” for pushing forward changes to the exchange rate, and “now is the best time,” said Zhang Bin, a research fellow at the Institute of World Economic and Politics under the Chinese Academy of Social Science early in January. Zhang said a 10% one-off appreciation of the yuan against the dollar “would have limited impact on China’s macroeconomy” and could deter inflows of speculative capital betting on future currency gains.

Though I would ordinarily bet against a revaluation because I believe China always errs on the side of overheating rather than on the side of a slowdown, I actually think a revaluation makes such good economic and political sense right now that I believe it to be at least possible.

What do you think?