China has "very limited scope" to keep its currency, the yuan, depreciating against the US dollar in the coming year, UBS Securities said on Wednesday.
The yuan, or renminbi (RMB), weakened to 6.8870 against the US dollar on the over-the-counter market on Tuesday, declining by the 0.5 percent daily limit for a second day. The RMB is allowed to trade by up to 0.5 percent against the greenback on either side of its central parity rate.
This has sparked speculation that China was shifting its policy on the exchange rate to allow the yuan's depreciation to help out its struggling exporters to avert economic slump and save jobs.
"We think it is too early to see the latest move as a signal of a significant change in China's exchange rate policy," Tao Wang, head of China Economic Research at UBS Securities, wrote in a research note.
The central parity rate of the RMB was set at 6.8502 to the dollar, compared to 6.8527 on Tuesday and reversing from weakening in the reference rate for four days.
As the United States, European Union, and Japan fall deeper into recession, the yuan's depreciation would "likely invite criticism that China is adopting a beggar-thy-neighbour type of policy, leading to possible protectionist responses from China's major export markets", Wang said.
"Its depreciation could also lead to a round of competitive devaluation in neighbouring economies, which would result in little material gains for China," she stated.
The economist forecasted the exchange rate of the yuan to the US dollar would move toward 7.0 by the end of 2008, but it could advance to 6.8 at the end of 2009 unless the dollar strengths by more than 10 percent against the currencies in China's main trading partners.
The yuan had for months remained steady against the dollar until the recent retreat. But it has appreciated by about 10 percent against the trade-weighted basket of currencies since August, as the dollar strengthened significantly in recent months against other major currencies, said Wang.
The appreciation of the effective exchange rate over the last four months is as large as the appreciation of the previous four years when the yuan appreciated steadily against a weakening dollar.
She added that yuan appreciation is likely to hurt the already bleak export prospect in China next year.