Rising yuan will not hurt trade, say bankers

By Wang Bo (China Daily)
Updated: 2010-07-31 08:30
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Beijing - There is no foundation for the yuan to move sharply and China can maintain a flexible exchange rate mechanism, making the currency stand at a basically reasonable and balanced level, a senior central bank official said on Friday.

Yi Gang, vice-governor of the People's Bank of China, said the pressure for yuan appreciation had eased as the value of the currency neared the equilibrium level after years of adjustments.

Yi, who is also head of the State Administration of Foreign Exchange (SAFE), said China would maintain its economic growth at above 9 percent this year. The country has overtaken Japan to become the world's second-largest economy.

"GDP growth will gradually slow down, but, if the country can strive to secure growth of an annualized 7 to 8 per cent this decade, that would still be a strong performance," Yi said.

Economists are interpreting the remarks, together with a series of public statements by another central bank vice-governor, Hu Xiaolian, on the benefits of a managed floating of the yuan, as sending a signal that China will maintain its currency's general stability and help ease the excessive focus on the yuan's value against the dollar.

"There is no need to focus solely on the yuan/dollar rate, because the structure of China's exports is changing greatly from what it was five years ago," said Zuo Xiaolei, chief economist at Galaxy Securities.

Europe has replaced the United States and become China's largest trading partner and yuan-denominated trade deals are also increasing, Zuo said.

"That means, we should pay more attention to the trade-weighted exchange rate because the country's trade is settled in more diversified currencies," she said.

The central bank is considering publishing the yuan's nominal exchange rate measured against the currencies of China's trading partners, which would lead to a more rational debate about the real value of the Chinese currency, the central bank's Hu said last week.

China scrapped its 23-month-old peg to the greenback in mid-June. Since then, the currency has risen some 0.7 percent.

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In Hu's latest statement about China's currency policy, which was posted on the central bank's website on Friday, she played down the yuan's impact on the country's exporters and said exchange rate reform would help ease inflationary pressure and reduce the cost of imports.

"The yuan's appreciation between 2005 and 2007 did not have a significant impact on the country's exports we must not underestimate exporters' flexibility and ability to adapt to a changing environment," Hu said.

However, economists said it is necessary to evaluate whether the yuan's appreciation has narrowed exporter's profit margins, especially at a time when external demand remains weak.

"A mild revaluation of the yuan might not affect exporters significantly but many of them couldn't survive if the currency goes up too fast," said Li Jianwei, senior economist at the Development Research Center of the State Council.