China will make a one-off revaluation of the renminbi (RMB) within the first quarter of the year and move to a tradeweighted basket of currencies to set its exchange rate by the second half, investment house Goldman Sachs predicted.
It expected China to revalue the RMB by 2.5% against the US dollar in a "prudent first move" towards a more flexible exchange rate regime. The measures would lead to a 5% cumulative appreciation over the next 12 months, it said.
The US dollar has been hitting fresh lows against the euro and other major currencies on an almost daily basis and this is pressuring China to address its exchange rate policy, the investment bank said.
China has been under persistent international pressure, especially from the US government, to revalue its currency, which is pegged at about 8.28 to the US dollar. As the dollar has dropped in value the RMB has followed, making China's exports even cheaper to the rest of the world.
After a period of mounting pressure from the US in the second half of last year, prominent officials, including Premier Wen Jiabao and President Hu Jintao, made a number of high profile announcements that China would not revalue its currency due to concerns over the ability of the shaky banking sector to withstand any shocks from currency fluctuation.
Goldman Sachs predicted the exchange rate would be RMB 8.07, 7.68 and 7.54 to the dollar in three, six and 12 months respectively.