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Yuan value seen rising in cautious increments
January 12, 2012, Thursday
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AS China's exports weaken and the trade surplus contracts, economists are expecting authorities to allow a slower appreciation of the yuan and adopt a more cautious approach in their resolve to reform exchange rates in 2012.
Here's how Chen Xuebin of the Institute for Financial Studies at Fudan University sees the yuan in 2012.
Chen Xuebin, Institute for Financial Studies, Fudan University
Last year, the yuan gained 4.84 percent against the US dollar, 4.93 percent against the British pound and posted double-digit gains against the currencies of emerging market currencies such as the South African rand and Brazilian real.
The valuation of the Chinese currency has entered a balanced phase, and overt appreciation of the yuan may hurt China's economic stability.
In fact, the valuation of the yuan, measured against a basket of currencies, has reached a record. At the same time, China's once-soaring trade surpluses have tempered to reasonable levels.
The surplus has dropped from 7.5 percent of gross domestic product in 2007 to an estimated 1.6 percent in the fourth quarter of 2011. If the yuan continues to appreciate, the slowdown in export growth will worsen.
In the interim, the Chinese currency will still track the US dollar quite closely, though with increasing flexibility. The yuan may gain 2 percent or 3 percent against the dollar in 2012, with fluctuation of about 1 percent to 2 percent.
In the medium- and long-term, maintaining a stable exchange rate for the yuan should be the main target of policy makers amid economic challenges facing Europe, the US and emerging markets.
To realize that goal, the yuan's link with the dollar should be eased further, and the currency's valuation should be set more comprehensively against a basket of currencies.
That adds transparency to the structure of the yuan's exchange rate and will help the currency become more international. Investors and users of the currency are able to more effectively hedge currency risks.
At the early stages of exchange-rate reform starting in 2005, the strict peg between yuan and the US dollar helped stabilize the outlook of the currency. But even as the authorities maintained tight control over foreign capital at that time, the peg was blamed for an inflow of "hot money," or speculative foreign capital betting on the yuan's steady appreciation against the greenback. As China gradually opens its capital markets, the peg has to be gradually lifted to prevent those inflows.
Authorities may need to expand yuan's trading range and give the market a larger role in determining its exchange rate.
Here's how Chen Xuebin of the Institute for Financial Studies at Fudan University sees the yuan in 2012.
Chen Xuebin, Institute for Financial Studies, Fudan University
Last year, the yuan gained 4.84 percent against the US dollar, 4.93 percent against the British pound and posted double-digit gains against the currencies of emerging market currencies such as the South African rand and Brazilian real.
The valuation of the Chinese currency has entered a balanced phase, and overt appreciation of the yuan may hurt China's economic stability.
In fact, the valuation of the yuan, measured against a basket of currencies, has reached a record. At the same time, China's once-soaring trade surpluses have tempered to reasonable levels.
The surplus has dropped from 7.5 percent of gross domestic product in 2007 to an estimated 1.6 percent in the fourth quarter of 2011. If the yuan continues to appreciate, the slowdown in export growth will worsen.
In the interim, the Chinese currency will still track the US dollar quite closely, though with increasing flexibility. The yuan may gain 2 percent or 3 percent against the dollar in 2012, with fluctuation of about 1 percent to 2 percent.
In the medium- and long-term, maintaining a stable exchange rate for the yuan should be the main target of policy makers amid economic challenges facing Europe, the US and emerging markets.
To realize that goal, the yuan's link with the dollar should be eased further, and the currency's valuation should be set more comprehensively against a basket of currencies.
That adds transparency to the structure of the yuan's exchange rate and will help the currency become more international. Investors and users of the currency are able to more effectively hedge currency risks.
At the early stages of exchange-rate reform starting in 2005, the strict peg between yuan and the US dollar helped stabilize the outlook of the currency. But even as the authorities maintained tight control over foreign capital at that time, the peg was blamed for an inflow of "hot money," or speculative foreign capital betting on the yuan's steady appreciation against the greenback. As China gradually opens its capital markets, the peg has to be gradually lifted to prevent those inflows.
Authorities may need to expand yuan's trading range and give the market a larger role in determining its exchange rate.
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