The yuan, or Renminbi (RMB), was set by the People's Bank of China (PBOC) to trade at a central parity rate of 6.992 per dollar on April 10 – the first time it has breached the 7-yuan mark against the dollar since the country dropped the dollar peg to its currency in July 2005.
Since the yuan was de-pegged from the dollar, it has risen 15.99 percent. This year alone, it has risen 4.47 percent as the dollar has continued to weaken. The rate of 7 yuan per 1 dollar was a crucial time for China to safeguard its financial interests and worth "serious deliberation," said Tan Yalin, a researcher in the Bank of China's global financial markets department.
The overly rapid appreciation of the RMB could be a double-edged sword; and experts are divided on the issue. Zhuang Jian, senior economist with the China branch of Asian Development Bank, views it in a positive way: by revaluing the yuan gradually, China's trade surplus will be reduced. This is generally conducive to China's economy as it helps eliminate trade conflicts and barriers and wins some space for balanced economic growth.
However, other experts believe that overly rapid appreciation poses a risk to China's double-digit economic growth – a large portion of which had been driven by exports. As export growth has slowed and import growth has picked up, the trade picture has begun to shift. For example, the trade surplus fell to 8.56 billion U.S dollars in February: roughly one-third of that one year earlier.
The RMB is already rising fast enough and China should first guarantee the stability of employment and economic order, said researcher Mei Xinyu at the Chinese Academy of International Trade and Economic Cooperation, a division of the Ministry of Commerce. Meanwhile, major trading partners such as the U.S. have been pushing for the yuan's appreciation. They argue that an undervalued currency made Chinese goods artificially cheap and resulted in a huge trade surplus.
On the other hand, China's trade surplus has sharply declined; and it is still unclear how long the declining trend will persist. Analysts said the fall was mainly caused by China's severe winter which affected export production and transportation; and weaker U.S. demand amid the ongoing credit crisis. Nevertheless, faster currency appreciation was also exerting pressure on exports.
China has been seeking to slow inflation and prevent the economy from overheating. When Premier Wen Jiabao met with visiting US Treasury Secretary Henry Paulson last week, he said that to perfect the exchange rate mechanism and improve flexibility have been made government tasks this year.
PBOC said last week that China will keep the yuan stable at a reasonable, balanced level. Some analysts echoed this statement saying that China needs a relatively stable foreign exchange policy to protect itself from speculative fund flows when the world economy is facing uncertainties such as the spreading credit crisis.
It took one-and-a-half years for the yuan to climb from a break of 8 on May 15, 2006 to 7.5 on October 24, 2007; and then less than six months to gain 0.5 yuan more, passing 7 yuan to the dollar for the first time since the fixed exchange rate ended in 2005.
The yuan is expected to appreciate even more; and China is expected to grant further flexibility to the exchange rate. Meanwhile, continued international pressure for greater yuan flexibility persists. The span of 5 percent will be a sound standard for the yuan revaluation, as neither a sharp one-off appreciation nor major fluctuation are desirable to China's long-term economic growth, according to Zhang Xiaojing, director of the macro economy studies office at the Chinese Academy of Social Sciences.
By People's Daily Online
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