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Analysts still expect yuan to appreciate
By Xin Zhiming (China Daily)
Updated: 2008-12-03 21:00

The yuan's steep fall this week does not signal a major shift in China's foreign exchange policy, and the long-term trend of yuan appreciation will not change, analysts said.

But it should not appreciate too fast as to make it unaffordable for exporters, said Lian Ping, chief economist of the Bank of Communications.

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The two-day Sino-US Strategic Economic Dialogue (SED), which starts tomorrow, will see Washington apply more pressure for the yuan's appreciation, but China's foreign exchange policy should be aimed to serve its sound domestic economic growth and big-margin appreciation of the yuan against the dollar is not advisable at the moment, analysts said.

"China is also a major importer of the world," said Liu Dongliang, currency analyst at China Merchants Bank. Fast yuan appreciation would hurt its exports, lead to unemployment and in turn would affect the global economy too, Liu said.

In the three trading days of this week, the yuan depreciated visibly against the dollar. Its central parity rate, which was set by the central bank, dropped to 6.85 against one dollar and remained at that level through to yesterday.

But the market transaction pushed the exchange rate of yuan against the dollar down 499 points to 6.8848 from 6.8349 on Monday, the largest single-day change since China de-pegged the yuan from the dollar in July 2005, according to Dow Jones data.

The change in the market rate has aroused rumors that the Chinese authorities would keep a weak yuan policy to support its fragile exports that have been battered by reduced external demand as a result of the global financial crisis and economic slowdown. "But I'm not sure whether the central bank will shift its policy," said Liu.

"We need to monitor the trend in the coming days to decide the official stance."

Wang Tao, head of the China economic research unit of UBS, agreed: "We think it is too early to see the latest move as a signal of a significant change in China's exchange rate policy."

The trend of the yuan's long-term appreciation will not change despite possible temporary two-way swings in recent months as Chinese exports weaken, analysts said.

The yuan has appreciated by about 10 percent against the trade-weighted basket since August 1 this year, even though it has hardly moved against the dollar, Wang said.

The appreciation has made days of exporters harder as they have also been hit by such factors as rising costs of labor and sharply reduced foreign demand. "The recent yuan appreciation is likely to hurt export prospects next year, which already looked bleak," Wang said.

China has recently pulled out all stops to keep its economy growing at a healthy rate after growth slowed significantly in the third quarter of this year. A $586 billion stimulus package has been kicked off and stimulative fiscal measures have begun. And experts have called for slower yuan appreciation or even depreciation to help exports before it becomes too late to act next year when the economy is expected to hit bottom.

"The sharp fall in yuan's value this week may reflect the worries of the authorities about the country's economic prospects," said Sun Lijian, senior economist with Fudan University.

But China has very limited scope for sustained yuan depreciation against the dollar in the coming year, Wang said. "We could see the yuan/dollar rate moving toward 7.0 by the end of 2008, but still expect it at 6.8 at end-2009, unless the dollar strengthens by more than 10 percent against China's main trading partners."

Liu from China Merchants Bank also said the rate could hit 7 in the coming weeks.


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