Complex world economic order spells murky future for yuan in 2011

16:57, January 10, 2011      

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The value of China's currency fell for the fourth straight day on Monday immediately after 10 consecutive days of appreciation ended on Jan. 4, which was the longest consecutive appreciation since China began foreign exchange rate reform in 2005.

This situation reflects concern on the market over the prospect of recovery in the United States and Europe as well as inflation in emerging economies, including China.

There are many forecasts on the trajectory of the RMB foreign exchange rate in 2011. Li Daokui, an advisor at China's central bank, has predicted a 5 percent to 6 percent appreciation of the yuan in 2011. China International Capital Corporation Limited (CICC) also said in its recent report that the yuan would be 5 percent stronger in 2011 than in 2010.

But can the extent of the fluctuation be predicted? An analysis by experts from Bank of China published on Shanghai Securities Journal on Monday, however, says no, given the uncertainties in the world economy.

The U.S. economy, the largest in the world, is expected to grow by some 3 percent in 2011, while the European economy shows a much less rosy outlook. As a result, the value of the U.S. dollar may rebound rather than continuing to weaken.

The emerging economies are definitely doing well and will continue the momentum in 2011. The International Monetary Fund predicted that based on purchasing power parity, the share of the emerging economies in the global economy would rise to 50 percent in 2014. That expansion will mean the shrinking share of the United States and Europe in the world economy.

The robust emerging markets are appealing to the massive capital that has been made by U.S. quantitative easing measures. That has been proven by the high returns of investment on currencies of emerging economies, such as the South Africa rand, the Thai baht and the Malaysian ringgit.

Given that, emerging economies are likely to take capital control measures, and trade restriction measures are possible in any economy in the world. That could trigger disputes on foreign exchange rates. China could face even higher pressure in those disputes.

The process of the internationalization of the yuan will also affect its value. Although the proportion of yuan transactions is still very tiny in the global foreign exchange market, China has significantly sped up the pace of making its currency more international since 2009, including the launch of the yuan-denominated cross-border trade settlement and offshore yuan bonds.

That momentum will continue in 2011. But a more international yuan needs a more flexible, more market-oriented yuan foreign exchange regime.

People's Bank of China Deputy Governor Yi Gang said during his visit in Spain recently that China would take further steps to improve the exchange rate formation mechanism of the yuan.

In conclusion, the Chinese currency is very likely to get stronger and more flexible in 2011. But the specific band of that appreciation is rarely predictable, and it is subject to both the changes of the U.S. dollar and the euro as well as the pressure of appreciation on currencies of emerging economies and the pace of the yuan's internationalization.

By Li Jia, People’s Daily Online


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