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Is China resuming yuan appreciation?

(Xinhua)
Updated: 2010-04-08 22:34
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BEIJING - China's currency made headlines Thursday amid increased speculation the government will resume its appreciation, but analysts said it is too early to make such a conclusion.

The central parity rate of the yuan, China's currency, also known as the renminbi (RMB), was unchanged from the previous day's 6.8259 per US dollar on Thursday, the lowest since May 2009, according to the China Foreign Exchange Trading System.

The strengthening of yuan was interpreted as a signal that China was about to resume yuan appreciation, after the U.S. Treasury Department announced it would delay the publication of a report that may have labeled China a "currency manipulator."

However, it was still too early and arbitrary to make such a judgment based on several days' observation of the yuan's movement, said Zuo Xiaolei, an economist with the Beijing-based Galaxy Securities.

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Allowing the yuan to appreciate against the U.S. dollar without reforming the exchange rate formation mechanism would be "a disaster" for China, but reforming the mechanism does not mean allowing the yuan to appreciate, Zuo said.

If the RMB started to strengthen against U.S. dollar under current conditions, expectations for further appreciation would be increased, which would accelerate the influx of speculative international capital and lead to serious inflation and asset bubbles in the country, she said.

China unpegged the yuan from the U.S. dollar in July 2005 and allowed it to fluctuate against a basket of currencies. It gained 21 percent before stabilizing against the dollar in the middle of 2008.

China's central bank governor Zhou Xiaochuan indicated last month the current exchange rate policy was part of the country's stimulus package, and the country would cautiously choose the timing to move from the "special policy" to a "regular policy."

A strong and one-off yuan appreciation would cool the economy, hurt the world economic recovery and hurt overseas consumers' interests, said Xia Bin, a researcher with the Development Research Center under the State Council, China's Cabinet.

Xia was one of the three economists named last month as members of the People's Bank of China's monetary policy committee, a key advisor in framing monetary policy.

Zhang Ming, an economist with the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, expected the country to resume the pre-crisis exchange rate policy in the second quarter of the year and said a widening daily trading band for the yuan is also likely.

At present, the yuan is allowed to float on the interbank market within a daily limit of 0.5-percent each way of the central parity rate.

Many western countries have long held that China artificially keeps the yuan exchange rate undervalued to help domestic exporters. Some US lawmakers even proposed legislation to impose tariffs on Chinese goods unless China allowed the yuan to climb.

China has repeatedly rejected claims the yuan is undervalued and said it would keep the yuan stable at an appropriate and balanced level, stressing a stronger yuan cannot redress China-U.S. trade imbalance or help ease U.S. job losses.