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How a bargain is found in London

WHEN Yang Xiaoshuo, a 26-year-old white-collar worker, bought his wife a Louis Vuitton Neverfull handbag via a friend in London as a Valentine's Day present, he paid 40 percent less than he would have paid in Shanghai thanks to the nose-diving pound sterling.

The couple are closely monitoring foreign exchange markets these days and are happy to see sterling taking a fresh battering on the forex markets.

The yuan hit 9.47 against the British pound on the last trading day before the Chinese Lunar New Year holiday, appreciating about one-third since December 2007.

"The London price tag is set at 355 pounds, or 6,000 yuan in Shanghai. I feel it would have been a loss not to bring the gift home after factoring in the attractive foreign exchange rate," Yang said.

Yang even thought about buying another luxury handbag to in an example of "spending more means saving more" philosophy.

The couple are not alone seeking luxury bargains overseas.

Despite the economic slowdown, Chinese consumers are using the stable yuan during the holiday to fill their wardrobes. They are shopping overseas, or turning to friends or professional agents traveling overseas as luxury products like premier bags and watches grow cheaper.

The Chinese yuan has appreciated 17 percent against the United States dollar since China depegged the currency from the greenback in July 2005.

The yuan's momentum against the US dollar has been on hold since the middle of last year, even depreciating and touching the 0.5 percent daily trading band at the year end. However, the yuan is gaining on a real effective exchange rate, or REER, basis.

As the greenback gained steam against other major currencies because of the credit crunch, a flat yuan-versus-dollar movement means that the Chinese currency is de facto gaining against other major currencies including the Australian dollar and the pound.

It is liberating Chinese shoppers in overseas tourist resorts and shopping magnets like Hong Kong.

However, economists are divided on Renminbi's next movement with some calling for a sharp depreciation to help the battered exports. Others still believe that a stable and even faster appreciation will do the Chinese economy good.

Liao Qun, CITIC Ka Wah Bank's chief economist, said he expects the yuan to appreciate 2 to 4 percent in a "moderate appreciation" in 2009.

"From a mid and long-term view, the trend of yuan appreciation is irreversible as China continues to integrate with the global economy." Liao said. "Yes, a weaker yuan can help Chinese exporters. However, the question is that when the external demand is shrinking, a relatively cheaper price won't make a big difference," Liao said. "Unless the yuan depreciates by 20 percent, which is unlikely, will there be a big help for exports. If not, a mild depreciation of the yuan won't be a significant help to exporters."

The yuan's REER is at a record high from 1995, squeezing China's exporters.

China's exports declined for the second straight month in December, dropping 2.8 percent, following a 2.2 percent decrease in November, the first such falloff in seven years.

On the home front, the central government is striving to catch up with an economic growth target of 8 percent this year.

To achieve this, the central bank announced a 4-trillion-yuan stimulus package in November, with infrastructure flagged as the main investment.

The Chinese economy has been dependent on exports and investment though the central government has taken measures to shore up domestic consumption.

Sebastien Barbe, Credit Agricole's senior economist, said he still expects exports and investments to remain a main driver for the Chinese economy but a stronger yuan can help shore up domestic demand.

He takes a middle position in the debate over the yuan's movement - he expects a weaker yuan this year but a rebound in 2010.

Barbe said he expects the yuan to depreciate a little in the first half of this year to touch 7.1 against the US dollar in June and then rebound to 6.90 at the end of this year and then rise to 6.50 at the end of 2010.

"A continuous and consistent appreciation of the yuan will be one of the means to stimulate domestic consumption in the long run," Barbe said. "A stronger yuan can also grant more purchasing power to consumers."

A stronger yuan could drive a domestic shopping spree with cheaper imported goods and could make the economy rely less on exports.

Lu Zhengwei, the Industrial Bank's chief economist, however, is strongly for the depreciation of the yuan.

"This may be the best time for the yuan to depreciate since 2002 against the backdrop of the current financial crisis," said Lu.

"Why does China have to keep its currency appreciating when the currencies of other emerging markets are weaker?"

Lu said a depreciated yuan, together with tax rebates for exports, will help the industry a lot.


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