My comment: It will help to control inflation.
http://news.xinhuanet.com/english/2008-04/10/content_7951437.htm
BEIJING, April 10 (Xinhua) -- China's currency, the yuan, was set to
trade at 6.992 yuan against the U.S. dollar on Thursday, breaching the
7-yuan mark for the first time since the government unpegged it from
the dollar in 2005.
Following an overnight fall of the dollar, the central parity rate
of the yuan, or Renminbi (RMB), gained 105 basis points to 6.992 yuan
against the dollar on Thursday, according to the China Foreign
Exchange Trading System.
Shen Minggao, an economist at Citigroup in Beijing, said that like
many economists, he was not surprised to see the yuan break the 7-yuan
mark.
"It was quite natural," he said, citing the dollar's fall against
other major currencies, especially the euro, since the second half of
last year along with an unfolding U.S. credit crisis plaguing the U.S.
economy.
China ended the currency's peg to the dollar in July 2005, and
since then the yuan's reference rate has been set against a currency
basket that also includes the euro, yen, won and British pound.
The yuan has gained 4.47 percent this year based on Thursday's
trading price, or 18.27 percent from 8.2765 yuan against the dollar
before the new currency regime was imposed.
Zhuang Jian, a senior economist with the Asian Development Bank
mission in China, also believed a weaker U.S. dollar was the most
direct factor behind the accelerated appreciation of the yuan.
The value of Chinese currency stayed above eight to the dollar for
many years before the 2005 regime reform. The yuan broke the 8-yuan
threshold on May 15, 2006.
Zhuang said the breakthrough was an indication of the country's
efforts to ****ft from a heavy reliance on ex****ts and investment as
well as to go after a more balanced trade structure.
ACCELERATED PACE TO EASE
The quickened pace had prompted many overseas banks to raise their
forecast of the yuan's 2008 annual gain against the dollar. Last month
the Standard Chartered Bank revised its prediction from9 percent to 15
percent.
However, economists agreed that the fast pace registered in
thefirst quarter would probably not continue throughout the year.
"We do expect continued appreciation going forward, but not quite
at the breakneck pace of the first quarter," the Switzerland-based UBS
Investment Bank said in a re****t released on Wednesday.
The bank said the "stabilization of the U.S. dollar in 2008" and
"greater signs of stress in the ex****t sector" due to the U.S. and
global slowing would help moderate the pace.
Some economists even expected that the yuan may not unilaterally
rise against the dollar for the rest of the year.
Shen Minggao said the appreciation pressure on the yuan would ease
and the yuan may even depreciate against the dollar, once the dollar
became stronger.
Tan Yaling, a research analyst with the Bank of China, also
expected the dollar to rebound in the second half, and said the 2008
U.S. presidential election could be a plus to making the dollar
stronger.
She continued to anticipate that the yuan would continue to
appreciate in the first half, but would re****t falls against the
dollar from time to time in the second half as the dollar rebounded.
Zhuang also expected the yuan to appreciate more slowly for the
rest of 2008 and said the year-end rate would probably be about 6.8
yuan per dollar.
The UBS re****t also pointed out that China's currency had not
gained much against other major currencies, as nearly every major
currency had rallied substantially against the dollar in the first
quarter.
The yuan had actually depreciated against the euro and the yen,
said Li Yang, director of the Institute of Finance and Banking under
the Chinese Academy of Social Sciences.
THE IMPACT ON CHINA'S ECONOMY
"A swifter appreciation of the yuan may not be a good choice for
China at the moment," said Tan Yaling. A rising yuan would raise costs
for the whole economy and make manufacturers' situation more
difficult, especially when Chinese companies began to go overseas, she
added.
However, Zhuang Jian said the country should continue to let the
yuan appreciate against the dollar despite the risks of an economic
slowdown and possible job losses at ex****t-oriented enterprises.
He added that a revaluation of the yuan would give the country a
good op****tunity to restructure the economy and address its trade
balance.
China's major trading partners have repeatedly argued that the
yuan was undervalued, which they say makes Chinese products
artificially cheap and causes a trade imbalance in China's favor.
The growth of China's trade surplus began to slow in the fourth
quarter in response to several Chinese moves to rein in ex****ts.
Weakening U.S. demand helped pare China's trade surplus to
8.56billion U.S. dollars in February, roughly one third of the year-
earlier level. The sharp decline could counter complaints from the
United States and European Union over China's trade surplus, which hit
a record 262.2 billion U.S. dollars in 2007, up47 percent year-on-
year.
Yet, the role of currency revaluation in containing China's trade
surplus remains uncertain. Tan said she believed the yuan's
appreciation hadn't helped rein in the trade gap or curb the growth of
foreign reserves.
Chinese manufacturers have already felt the pinch of the rising
yuan. An industry survey released this month said that rising costs
and the stronger currency were squeezing Chinese cotton textile
companies, with nearly half considering going out of business.
Tan also said that the central bank should introduce more
flexibility into the currency by further widening the yuan's daily
trading band, which is now 0.5 percent. Doing so could make
speculation in the currency more difficult, she said.
A HELPING HAND IN CURBING INFLATION?
Inflation took its biggest jump in nearly 12 years in February,
when the consumer price index (CPI) rose 8.7 percent year-on-year.
Little easing in inflation is expected for March or the first
quarter.
Some economists, such as Zhuang, have said that a faster yuan
appreciation would help relieve inflationary pressure.
Others disagreed. Zuo Xiaolei, chief economist at Galaxy
Securities, said that currency appreciation couldn't temper China's
inflation. That view was echoed by Tan Yaling, who pointedout that the
yuan was actually strengthening in tandem with escalating inflation.
"There's no evidence that currency strengthening would have any
near-term effect" on the inflation rate, according to the UBS re****t.
Zhuang said, however, that a stronger yuan would curb inflation
over the longer term.
Central bank governor Zhou Xiaochuan said last month that the
country would rely on comprehensive measures, not just the currency's
value, to fight inflation, though he admitted that an appropriate
appreciation of the yuan could help check inflation.
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