"Expectations of an imminent move in China's currency are growing" mainly because conditions within China are ripening for such a move, said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank.
China's economy has shown signs of overheating after a massive dose of stimulus last year, with growth topping 10 percent, inflation rising at a 2.7 percent rate last month, and property values registering mind-boggling gains. A rise in the yuan would complement China's efforts to cool the economy by lowering the price of imported goods, tempering inflation pressures.
But Mr. Bennenbroek said China may want to wait until the U.S. dollar is on a clear uptrend against other currencies to minimize the disruptive effect of its own actions. Wells Fargo expects the Chinese currency to resume appreciation by midyear and rise between 6 percent and 8 percent a year after that.
Since China's currency is widely estimated to be 40 percent overvalued against the dollar, critics say, the gradual change many analysts are predicting will not do much to curb the U.S. trade deficit or China's unprecedented accumulation of foreign currency reserves, which it amasses as it buys dollars to prop up the U.S. currency. They point to experience with the earlier 20 percent gain in the yuan.
"The change was too small and too gradual even to begin the process of reversing Chinas current account surplus with the world," said Lloyd Wood of the Fair Currency Coalition, a group that is pushing to penalize China with tariffs on Chinese exports unless it moves quickly to drastically realign its currency.
But other analysts caution that moving too fast could hurt the United States as well as China, since the U.S. is highly dependent on China to finance its huge budget deficits, which surpass $1 trillion for years to come.
Geoff Dyer, a Beijing correspondent for the Financial Times, notes that a sudden 40 percent jump in China's currency value would make China look like the economic juggernaut many Americans fear by ballooning the size of its economy and military in dollar terms.
"It would catapult China way beyond Japan and leave it half the size of the U.S." as the world's second largest economy, he said, while China's banks and oil companies would suddenly become the world's largest. "The phrase 'be careful what you ask for' works as well in Chinese as English."
