Greenback decline has ripple effects

By Xin Zhiming (China Daily)
Updated: 2007-11-26 06:54

The falling US dollar could further stoke inflation in China and encourage the inflow of speculative capital while trimming the trade surplus, analysts have said.

The greenback has depreciated about 40 percent against the euro since 2001, according to the latest report by China International Capital Corporation (CICC).

Against the renminbi, it has fallen about 10 percent since the Chinese currency was de-pegged from the dollar in July 2005.

On Friday, the renminbi rose sharply to a post-revaluation high and traded at 7.3989 to the dollar after touching an intraday peak of 7.3980, sharply higher than 7.4145 at Thursday's close.

CICC expects the weakening trend of the dollar to continue until mid-2009.

The declining dollar could contribute to rising inflation, said Guo Tianyong, an economist with the Central University of Finance and Economics.

Reduced returns on the greenback would drive some of the international capital into China to seek better returns; and the increased liquidity would put more pressure on inflation, he said.

The consumer price index (CPI), the main gauge of inflation, was 6.5 percent in October, matching the decade's high in August. It was 4.4 percent in the fist 10 months, much higher than the benchmark of 3 percent set by the central bank for the whole year.

Also, as the dollar depreciates against currencies of economies producing resources such as oil, grain and raw materials, it will mark up the nominal prices of commodities.

In turn, the prices China pays for those commodities would rise, thus stoking so-called "imported inflation", said Guo.

"Interest rate hikes would not do much to ease this, because they cannot offset the effect of international factors," he said.

China has raised the interest rate five times this year.

The falling dollar will also attract more foreign capital, including some speculative money, into China to seek better returns, analysts said.

Although the authorities have strengthened foreign exchange management, it seems that foreign speculative capital keeps flowing in, although it is hard to fix the exact amount of the "hot money", said Shi Jianhuai, economist with Peking University's School of Economics.

Normal trade-related capital inflows, for example, may include some hot money, he said.

On the other hand, the relative rise of the renminbi's value would also help ease China's trade surplus expansion, analysts said.

"It will make China's exports more expensive and imports cheaper, thus narrowing the gap between exports and imports," said Shi.

China registered a trade surplus of $212.4 billion in the first 10 months, up 59 percent year on year. But growth in October dropped 0.5 percentage points from a month earlier, while import growth increased by 9.4 percentage points.

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