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Yuan's fall not part of policy
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08:14, December 04, 2008

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The steep fall of the yuan this week does not signal a major shift in the country's foreign exchange policy or its long-term currency revaluation trend, analysts said.

But the yuan should not rise too fast because that would hurt exporters, who are already reeling under the impact the global financial crisis, said Lian Ping, chief economist of Bank of Communications.

The two-day China-US Strategic Economic Dialogue (SED), which starts today, is likely to see Washington imposing greater pressure on Beijing to revaluate the yuan.

But China's foreign exchange policy should be aimed at helping domestic economic growth, for which the yuan should not rise too fast against the US dollar now when the global financial market is in turmoil, the analysts said.

But "China is also one of the largest importers in the world," said Liu Dongliang, currency analyst with China Merchants Bank. A fast revaluation of the yuan would hurt its export, increase unemployment and harm the global economy further.

In the three trading days of this week, the yuan fell visibly against the dollar. Its central parity rate, set by the central bank, dropped to 6.85 against one dollar and remained at that level on Wednesday.

But market transactions pushed the exchange rate of the yuan down 499 points to 6.8848 from 6.8349 against the dollar on Monday, the largest one-day change since China de-pegged the yuan from the dollar in July 2005, according to Dow Jones figures.

The change in the market rate has given rise to rumors that China would resort to a "weak-yuan" policy to boost its falling exports, which have suffered because of shrinking international demand.

"But I'm not sure whether the central bank would change its policy," said Liu. "We need to monitor the trend during the coming days to decide the official stance."

Wang Tao, head of China economic research unit of UBS, corroborated Liu, saying: "We think it's too early to see the latest move as a signal of a significant change in the exchange rate policy."

The yuan's long-term revaluation trend will not change despite the possibility of a temporary two-way swing in recent months as Chinese exports weaken, the analysts said.

The yuan has risen by about 10 percent against a basket of currencies since August 1, even though it has hardly moved against the dollar, Wang said. The revaluation has made life more difficult for exporters because they have been hit by factors such as rising cost of labor and sharply reduced falling overseas demand. "The recent yuan revaluation is likely to hurt exports next year a year that already looked bleak," Wang said.

The government announced a $586-billion stimulus package on Nov 9 and it cut the interest rate by 1.08 percent, highest in 11 years, 17 days later to boost domestic demand and insulate the economy from the global financial crisis.

Experts have said the yuan should be revaluated slowly - or should even be allowed to fall - to help exporters and make the stimulus package more effective.

Source: China Daily

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