Will they or won?t they?

The tantalising possibility that China?s currency will be revalued has become something of an an unhealthy obsession for foreign exchange traders, financial analysts and US politicians.

Their misery was compounded this week when Wen Jiabao, China?s premier, delivered a typically sibylline message. First, he warned that a revaluation of the renminbi might have adverse effects on the global economy and foreign companies investing in China.

Shortly after these unusually blunt words, Mr Wen fell back on the cryptic metaphors so beloved by Chinese leaders to illustrate the policy dilemma faced by Beijing. ?The Chinese economy is like sailing upstream ? either it keeps forging ahead or it will fall behind.?

And, to muddy the water even further, he stated: ?As for the timing and what measures will be adopted, this could be unexpected.?

Thank you, Mr Premier. A big policy speech later and we are still none the wiser as to China?s real intentions towards its currency?s peg to the dollar.

The result is that foreign ?experts? keep using whatever scrap of data or official comment they can find to support their own predictions.

For Thomas Deng at Goldman Sachs, for example, China?s bulging foreign reserves and rising trade surplus suggest a 5 per cent revaluation of the currency against the dollar is not far away.

Others, including the famous economist Joseph Stiglitz, believe the Chinese should not, and will not, move any time soon. They argue that, with inflationary pressures subdued, there is a high risk that a stronger yuan would hit two crucial economic sectors.

In this view, a rising currency would hammer poorer farmers by reducing foodstuff prices and hit most state-owned banks by increasing the value of their bad loans.

For what is worth, I think the best way to understand what the Beijing leaders are up to is to keep a close tab on their non-currency related statements. As any good magician will tell you, the key to pulling off a successful trick is to focus the audience?s attention away from the hand performing the illusion.

Considering China?s recent economic performance and astounding growth figures, Mr Wen and his colleagues should know all about magic.

For example, this week?s little-noticed announcement that the People?s Bank of China, the central bank, is tightening mortgage lending argues against a near-term renminbi revaluation.

One of the main benefits from a rise in the currency would be to curb excessive growth in booming sectors such as property. Any administrative measure aimed at dampening damping the current real estate?s exuberance suggest the authorities have not yet decided to resort to the ?nuclear weapon? of currency revaluation.

A similar message is contained in a boring-looking announcement on the expansion in the number of brokers and traded currencies in China?s domestic forex market.

Presumably, these new players need some time to learn the ropes and the last thing they want is having to grapple with a flexible exchange rate that the world and his wife want to trade.

Of course, I could be soon joining the swelling ranks of forecasters who got it wrong on the renminbi. If I am, forex speculators will finally make some money on their months-long ?one way bet?, but equity investors should be careful.

The obvious play to benefit from a revaluation is to buy companies with a high level of costs and debt in US dollars and steer clear of those that earn their corn in greenbacks.

So, for example, China Eastern Airlines and China Southern Airlines ? both listed in Hong Kong ? could see earnings increase by nearly 20 per cent if the renminbi rises 10 per cent against the dollar, according to Goldman Sachs.

Conversely, chemicals groups such as Sinopec Yizheng Chemical Fibre, or the semiconductor maker SMIC, which earn more than 80 per cent of their sales in dollars, would be hit. And then there are the banks. In theory, the four giant state-owned lenders should not suffer from the end of the peg as their foreign exchange exposure is limited. In practice, though, the dollar value of their non-performing loans (NPLs) would increase overnight. And that, for me, is the crucial argument Capitol Hill and Wall Street should consider when thinking about the renminbi.

After spending $45bn to reduce the NPLs of China Construction Bank and Bank of China ahead of their international listings, why would the Beijing?s skippers want to ?sail upstream? against the headwind of a banking crisis?

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