Greece gives China a window for yuan reform - Citi

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Global market turmoil in the wake of Greece's debt woes presents China with a "unique opportunity" to reform the yuan, Citigroup economists said on Monday.A weaker euro and China's narrowing trade surplus have both reduced the need for a stronger yuan and thus suggest that any appreciation will be very modest, Ken Peng and Shen Minggao said in a note to clients."But the risk-off environment provides a unique opportunity for authorities to modify the currency regime independent of external pressure," they added.The government was likely to announced a managed float regime of pegging the yuan to an undisclosed basket of currencies, they said. Under the current system, the yuan's exchange rate is managed with reference to a basket of currencies and is not formally pegged to it.China has held the yuan steady at about 6.83 to the dollar since mid-2008 to cushion the economy from the global financial crisis.A fear of attracting hot money inflows is one of the reasons that Beijing has been reluctant to let the yuan resume appreciation. The government also appeared to dig in its heels when confronted in recent months by an onslaught of foreign calls for a stronger exchange rate.Both of these inhibiting factors have subsided somewhat, the Citi economists said.As investors tilt towards risk aversion, a move on the yuan may not suck in too much speculative capital. Moreover, Beijing would not appear to be bowing to foreign pressure with so much attention now focused on the Greek crisis and not the yuan's role in causing global economic imbalances.Many analysts believe that worries about a contagion spreading from the Greek debt crisis could prompt China to act slowly in letting the yuan appreciate. Chinese government advisers have said that Greece's woes would not derail exchange rate reform.Reduced expectations for appreciation were visible last week in the offshore forwards market, when prices implied predictions of just a 0.8 percent yuan rise over the next 12 months.Those forwards are now pricing in about a 1.7 percent gain, below the roughly 3 percent level that was the consistent expectation earlier this year.(Reporting by Simon Rabinovitch; Editing by Ken Wills)

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