Over the last two weeks, Asian currency markets have been rife with speculations of an impending revaluation of the renminbi. Indeed, there has been a series of what could be considered hints from decision makers in Beijing regarding a possible move in the renminbi exchange rate. Yet analysts agree that a revaluation is unlikely to happen amid current market speculations and that the window of opportunity for such a move will likely be next year.

It all started when Zhou Xiaochuan, governor of the People's Bank of China, was quoted as saying the country would move to employ a more flexible foreign exchange management mechanism.

China's foreign exchange rate will be mainly up to demand and supply in the market ... and China will not pursue foreign-trade current account gains and galloping growth in its foreign exchange reserves, Zhou told the Beijing-based Financial Times while attending the G-7 meeting.

The paper said Zhou hinted China was preparing for a foreign exchange rate regime with more flexibility by reshaping its banking sector and foreign exchange management mechanism.

Zhou has not been the only official rattling markets.

Officials from China's State Administration of Foreign Exchange (SAFE) have clouded the issue. One spokesman called rumors of a renminbi revaluation groundless, saying improving the exchange rate mechanism was a goal, but the pace would depend on the nation's economic development, macroeconomic performance, international balance of payments and other related reforms. This could not be done overnight and there was no timetable, the spokesman stressed.

Yet SAFE's head, Guo Shuqing, has also said that while a stronger renminbi could exacerbate employment problems in China a managed float would not have that great an effect on employment. He also cited the beneficial effects of a stronger yuan from lower import costs, which he said could boost imports, production and employment.

Mr. Guo's message seems to be that rapid growth and high inflation make a yuan revaluation more likely, noted ING economist Tim Condon.

Most recently, Yu Yongding, director of the World Economy and Politics Research Institute of the Chinese Social Science Academy and a member of the central bank's Monetary Policy Committee, wrote an article saying that improving renminbi exchange rate flexibility was necessary and feasible.

Yu made this statement in China Forex Management, an internal magazine of the State Administration of Foreign Exchange (SAFE), the FX watchdog, analysts said. Yu argued that China should allow exchange rate fluctuation within an adequate range, and broad stability of the renminbi exchange rate would not mean no changes in the exchange rate and the exchange rate regime.

If the currency appreciates 1 percent, 2 percent or 3 percent, or depreciates by similar scope, does this mean that the exchange rate is not held broadly stable? The answer is no, he wrote.

Regarding the timing of renmibi revaluation, Yu thought it would happen at a time least expected by the market.

Most analysts agree that the recent market speculations a revaluation is imminent are unfounded.

The renminbi revaluation is unlikely to happen amid market speculation...China is unlikely to bow to foreign pressures and will make the adjustment only at a time they believe to be most optimal to them, said Joyce Chang, an analyst at JP Morgan.

Economists believe China must first carried through some reforms in its banking sector before changing its exchange rate mechanism as the sector will have to be well prepared for fluctuations in the exchange rate. Some argue conditions are not ripe for leaving the exchange rate to market forces.

We reiterate our view that a window of opportunity for China to de-peg from the dollar is emerging in the coming 12-18 months with the first half of 2005 the most probable time, said Dong Tao, chief economist for Asia at CSFB.

The focus will be on adjusting the exchange regime, i.e. allowing more flexibility in the exchange rate, rather than the exchange rate itself, i.e. currency appreciation, Tao predicted. A currency basket, possibly consisting of China's top ten trade partners, is expected to replace the current dollar peg. This could entail minor currency appreciation of 3-5 percent, but we do not anticipate any greater movement in the initial step, he added.

Allowing the renminbi to appreciate a bit would reduce import costs and put downward pressure on inflation, economists said.

As a bottom line, if the CPI exceeds 5 percent for another couple of months -- ING is forecasting 5.5 percent for September -- we believe the odds of a renminbi revaluation rise. High oil prices increase the likelihood of this, Condon said.

While Condon said the conditions are improving for a renminbi revaluation, he added there was still no compelling argument for revaluing the currency on a 6-12 month view.

The main reason is that with inflation at 5 percent the renminbi's undervaluation (5 percent as of September on our calculations) is rapidly disappearing. Even more so for the sectors affected by cuts in tariffs and other import barriers that are being undertaken as part of China's trade liberalization reforms, Condon said.