Yuan under pressure to appreciate

By Wang Xinyuan

The yuan faces appreciation pressure because it has missed the best time to allow floating, market analysts said.

The dollar central parity rate rose to 6.828 from 6.8275, pushing the yuan down slightly against the dollar Monday, according to the State Administration of Foreign Exchange.

In the long term, the yuan is facing great pressure to appreciate, Lu Zhengwei, chief economist of Industrial Bank, told the Global Times.

China is likely to raise the interest rate next year to fend off inflation risks brought on by the huge credit release which followed the economic stimulus package, according to market analysts.

In early October, Australia became the first G-20 country to raise its cash rate since the start of the financial crisis. The main interest rate went up by one-quarter of a percentage point to 3.25 percent.

This marks the start of major economies' gradual exit from loose monetary policies and the beginning of interest rate increases in major economies worldwide, according to a recent report released by Industrial Bank.

China is facing a currency dilemma. The yuan is under great pressure to appreciate as both developed and emerging economies try to boost their exports to China. But China's export slump will further deepen if the yuan appreciates while other currencies remain unchanged.

"Yuan appreciation seems inevitable, it's only a matter of how much," said Chen Hong, chairman and CEO of the Hina Group, an investment banking and private equity firm.

"Any appreciation of a single country's currency could lead to a massive inflow of hot money. All countries should act together to ensure a safe exit from the recession," Chen Siwei, a renowned economist, told the Global Times at the Global Entrepreneur Summit 2009 Saturday.

"The room for appreciation is limited and the yuan should not be allowed to rise unless it is done in concert with other currencies," Tan Yaling, a Beijing-based finance expert, told the Global Times.

However, if China had let its currency depreciate between the fourth quarter of 2008 and the second quarter of 2009, there would be greater room for appreciation now, he added.

The price of commodities during that period of time was relatively low and stable, and the impact of hot money would have been weak as most hedge funds were drained by the crisis. Therefore, it would have been the best time to depreciate the yuan and then later let the exchange rate float more, according to Lu.

China officially reformed its exchange rate regime from a dollar-pegged yuan to a managed floating exchange rate linked to a basket of currencies in July 2005.

Based on successful experiences of other countries that have already completed the transition from a fixed currency to a free floating exchange system, it is necessary to gradually adapt to greater volatility so the market will have time to mature, Lu said.

Once the yuan's fluctuations are big enough, businesses will become aware of exchange rate risks, and there will be large demand for risk aversion products. Without sufficient supply and demand of such products, however, the exchange rate reform will continue to stall, according to Lu.

Currently, the yuan stays within a range of 0.5 percent against the US dollar, which is not enough to get the reform process going, Lu said.

The exchange rate reform must be accelerated though we should be aware that it will take several years to be completed, Lu noted.
 

Explore the World, Understand China!
Please log on www.gloaltimes.cn