Stronger Chinese yuan impacts on Indonesian economy: WB official

16:33, June 23, 2010      

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An appreciation of Chinese yuan could impact Indonesia's economy through a number of different channels, with potentially offsetting impacts, the World Bank official said here on Wednesday.

"On bilateral trade channel, an appreciation of yuan relative to rupiah leads to the prices of Indonesia's export goods being more attractive to Chinese buyers in the short-term. It also makes Chinese goods more expensive in Indonesia, potentially raising Indonesia's trade balance with China," said Subham Chaudhuri, chief economist of World Bank's Jakarta office in his presentation of the bank's "June Indonesia Economic Quarterly Report" released here.

He added that in terms of the impact via third-party trade, to the extent that Indonesia's exports are vertically integrated with China's production process, Indonesia's exports could deteriorate as China's export declines.

In terms of foreign direct investment, he said, higher yuan potentially makes Indonesia a more attractive investment destination for Chinese investors.

"This could encourage the shifting of production facilities to Indonesia, increasing domestic investment," said Chaudhuri.

In the longer-term, the improved competitiveness may also lead to an increase in Indonesia's exchange rate which will mitigate any further improvement in export competitiveness. "If yuan was to appreciate, it may also encourage central banks in the region to allow their own currencies to appreciate without fear of losing competitiveness," he said.

Between 2005 and August 2008, yuan appreciated by around 20 percent against U.S. dollars from around 8.3 yuan/USD to 6.8 where it is today. Because rupiah has tended to stay level with the U.S. dollar at around 9,000-10,000 range, yuan has appreciated against rupiah as well since 2005.



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