Chinese Online Class - Chinese economists warn of risks of continued yuan appreciation

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BIZCHINA / Center

Chinese economists warn of risks of continued yuan appreciation

(Xinhua)
Updated: 2007-07-25 14:15

Chinese economists have warned that the continued yuan revaluation in a
single direction may adversely affect the country's economic and
financial security, as they saw the yuan kept going higher at a faster
pace since the beginning of this year mainly due to outside pressure.

The Chinese currency, the yuan, had been rising in small steps during the
first year after the central bank dropped the peg to the US dollar in
July 2005 and linked the yuan to a basket of foreign currencies.

The driving force behind the yuan appreciation then was the economic
growth itself and the progress in the financial sector, said Tan Yaling,
a research analyst with the Bank of China.

However, in 2006 and 2007, the yuan picked up in the speed of
appreciation, becoming the prey of global investors and speculators.

Meanwhile, the yuan is getting more closely related to the performance of
the US dollar. The central parity price of the yuan would go up against
the weak dollar, and the pressure of appreciation would be relieved when
the dollar rebounded.

China is under great pressure to revaluate its currency as the US blamed
China's currency controls for a bulging trade gap between the two
countries, saying the yuan was undervalued to give Chinese exporters an
unfair price advantage.

China's central bank announced in May to allow the yuan to fluctuate
against the US dollar by 0.5 percent a day, up from the previous 0.3
percent, in a bid to make the currency more flexible.

The real value of the yuan has gone up by 4.41 percent since it was
revalued by 2.1 percent from 8.28 yuan in July 2005, according to latest
statistics from the Bank for International Settlements.

The accelerating pace of the yuan revaluation and the amounting pressure
for the yuan appreciation are independent of the country's monetary
policy, said Tan, adding that the trend might be going against the real
situation of the Chinese economy.

Many, including the US Federal Reserve Chairman Ben Bernanke, said the
yuan appreciation was in the interest of China.

They have too much focused on the price of the currency and neglected the
structural problems of the country's economy and its financial sector,
Tan said.

The Chinese economy is still at the low end of market economy, compared
with the high-end developed economies to which the yuan is linked, in
terms of technologies, production efficiency, industrial development and
consumption, she said.

(For more biz stories, please visit Industry Updates)

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