Although many economists have a watchful eye on the financial situations in countries such as Greece, Spain, Ireland and Italy as Europe’s economic situation continues to face turmoil, Goldman Sach’s (NYSE: GS) Chief Economist John O’Neill warns that China may be the country worth paying attention to, hinting that China may be poised to strengthen its currency as much as 5% to slow the fastest growing major economy in the world.
In a telephone interview from London last week, O’Neill said that “I have a strong opinion that they’re close to moving the exchange rate.” This statement comes after China’s central bank told lenders to set aside larger reserves on February 12th. O’Neill commented that “Something’s brewing. It could happen anytime.”
China’s policy makers are looking to curtail credit-fueled growth after the country’s economy grew at the fastest pace since 2007 during the fourth quarter of 2009. Banks have extended 19% of the 2010 lending target of 7.5 trillion yuan in January (about $1.1 trillion) as property prices have risen them most in the last 7 quarters.
O’Neill said that China may allow the yuan to rise as much as 5% in a one-off reevaluation and then trade them within a bigger band or against a larger basket of currencies. He said that the move would help counter international pressure from the United States and other countries.
A record level of lending during 2009 and a 4 trillion yuan stimulus package helped China lead the recovery from the worst recession in modern history. However, Concerns about investment bubbles in China have increased this year and there are fears about what actions China’s government may take to prevent or deflate them.
