SOONER rather than later, China will demonstrate its growing global economic clout by revaluing its currency. When it does, the impact will be felt in a way that is unprecedented for a developing country.

The yuan, also called the renminbi, has been pegged at 8.28 per dollar for the past decade. However, well-connected China-watchers say that a move is now imminent. Many expect a modest revaluation to start with, perhaps in the order of 3 per cent. That might not sound much, but it is expected to pave the way for other Asian governments to let their own currencies rise, increasing the price in the West of everything from toasters to trainers.

JP Morgan Chase believes that China may want the international kudos of announcing a revaluation before President Hu Jintao joins Tony Blair and other world leaders for a summit at Gleneagles in early July.

“All signs are pointing to an imminent revaluation of the Chinese renminbi,” the bank said in a report. “Fundamentals have been demanding a move for some time.”

The US, which last year had a trade deficit with China of $162 billion (£87 billion), is putting pressure on the Chinese to revalue. Senators, worried that they, as well as their electors, may soon lose their jobs if they do nothing about it, are threatening to slap a 27 per cent tax on Chinese imports if Beijing does not play ball.

However, just as Mr Blair insists he will not join the euro unless it is in Britain’s interest, Mr Hu and other Communist Party leaders are adamant that they will unshackle the yuan only when they — and not others — feel the time is right.

Yet something is afoot. Zhou Xiaochuan, Governor of China’s central bank, recently said that all necessary technical and political preparations for a shift were in place. Wen Jiabao, the Prime Minister, pledged in March to keep the value of the yuan basically stable, a hint to traders that any move to revalue the currency would be small, and gradual.

However, Mr Wen, reflecting China’s deep distrust of speculators, also said that the timing of any change in the system would be unexpected.

One reason that China is keen for an element of surprise is to limit destabilising inflows of speculative money from investors wanting to convert funds into yuan in advance of a revaluation. Capital inflows, mostly invested by Taiwanese, Hong Kong and Chinese businessmen, have already lifted property prices in Shanghai, Beijing and other cities.

Chinese officials are nervous of the consequences if a property bubble should burst. They are also concerned that by making the yuan more valuable, and so making imports cheaper, China would be flooded with foreign products, particularly staples such as grain and edible oils that will hurt hundreds of millions of peasant farmers. A new blow to rural incomes, which are a fraction of urban wages, could trigger social unrest.

Beijing is also anxious to avoid appearing to bow to international pressure. Washington and Paris both believe the yuan is undervalued by up to 30 per cent. “We’re not happy with where they are and now is the time for them to move,” John Snow, the US Treasury Secretary, said earlier this month.

China’s surging exports have hardened the conviction that Beijing is unfairly holding the yuan down. A flood of Chinese garments since the lifting on January 1 of quotas on textile exports has caused anger in the US and Europe.

The EU says that imports of nine categories of clothing and textiles soared by 534 per cent in the first three months of this year. Peter Mandelson, the EU Trade Commissioner, is under pressure from France to follow America’s hard line. Washington has said it might impose import curbs on Chinese trousers, shirts and underwear. China hit back by saying that such sanctions would violate world trade rules and that it might retaliate.

However, China is not immune to outside noises. Last month, Mr Zhou, the central bank chief, said that China was sensitive to foreign pressure and could accelerate reform.

China’s economy would appear strong enough to weather the impact on exports. Its trade surplus hit US$21.2 billion in the first four months of this year, compared with a deficit of US$10.7 billion a year earlier.

The economy grew at 9.5 per cent in the first quarter. Officials have said preparations are in place for a revaluation. This week, China’s domestic foreign exchange market will start to trade the dollar against a clutch of currencies, including sterling and the euro. Sheltered traders, used only to life with a fixed currency, will get a gentle introduction to the sort of risks that they will have to handle come the day the yuan is cut loose.

The next few months look ideal. China’s $659 billion of foreign reserves are dwarfed only by Japan’s, it is enjoying a big surplus on its balance of payments, and inflation has failed to materialise.

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