Stronger yuan mainly due to US dollar depreciation

Posted on May 10, 2011 in AllEconomic News
The appreciation of the yuan, China’s currency, against the US dollar has mainly occurred because of a weaker dollar, experts said, warning that an influx of “hot money” could follow.

The value of China’s yuan hit a new high against the US dollar on Monday as the central bank fixed the central parity rate at 6.4988 yuan per US dollar, just ahead of the China-US Economic and Strategic Dialogue, which opened on Monday in Washington.

The symbolic 6.50 ratio was broken for the first time on April 29, when the central bank set its parity rate at 6.4990 yuan per US dollar. The yuan exchange rate has gained by almost 1.9 percent against the US dollar since the start of this year.

It has also risen by nearly 5 percent against the greenback since June 19 of last year, when the central bank pledged that it would make its exchange rate formation mechanism more flexible.

“The US dollar is weakening. That’s the main factor behind the accelerated appreciation of yuan,” said Su Guojian, research and managing director of China Construction Bank International, a Hong Kong subsidiary of the mainland’s China Construction Bank.

In late April, the US Federal Reserve decided to keep its low interest rate unchanged for an extended period. The reserve said it would continue its 600-billion-dollar bond-buying program through June.

The reserve’s decision has weakened the value of dollar, with the currency plunging to its lowest level since July 2008.

The greenback is losing its attraction and might fall into crisis if the Federal Reserve maintains its loose monetary policy, said Zhou Shihong, director of the China Finance Research Institute.

After pumping money into the global market, which has created inflationary pressure around the world and decreased the value of dollar, the US government is pressing the Chinese government for a stronger yuan.

US Treasury Secretary Timothy Geithner said last week that China is letting the yuan rise more rapidly to curb inflation, but needs to move even more swiftly toward a market-driven exchange rate.

China’s central bank said in a report last week that the government would keep the yuan exchange rate stable and would steadily make reforms to the yuan exchange rate formation system.

As the third round of the China-US Economic and Strategic Dialogue opened in Washington, it is expected that the renminbi exchange rate will be one of the issues on the agenda.

“The US is moving toward a weaker dollar, and a stronger yuan will help reduce their debt, as any change in the dollar’s exchange rate will affect their debt,” said Song Guoyou, a professor at Shanghai’s Fudan University.

Economic data show that China, the largest creditor of the United States, held $1.15 trillion in long-term US Treasury securities as of February of this year.

The US government’s quantitative easing policy has caused excessive liquidity in the global market, which has encouraged other nations to demand stable exchange rates, said Chen Ye, a senior researcher with the Beijing-based Anbound Group, a private industry think tank. Therefore, China has good reasons to maintain its current monetary policies, Chen said.

China’s Vice Finance Minister Zhu Guangyao said on May 6 in Beijing that China and the United States agree on the direction for yuan reform, but remain divided on the specifics.

“China believes the objective is to deepen exchange rate reforms, while the United States is focused on the range of the yuan’s appreciation,” Zhu said.

US officials have argued that letting the yuan appreciate more rapidly will allow China to better control its inflation.

Analysts said that domestic inflation is another factor prompting the faster appreciation of the yuan, as prices of food, fuel and other commodities are surging in China.

Zuo Xiaolei, chief economist with China Galaxy Securities, said that the fast appreciation of yuan can lower import prices, but will increase market expectations for stable and risk-free appreciation.

This may spur an influx of international capital and offset the government’s efforts to drain excessive money, Zuo said.

To prevent excess international capital from entering China, the government should eliminate expectations for stable appreciation and increase costs for speculation, said Song.

Song believes that the yuan should appreciate at “the right time” and should do so in a non-linear fashion.

via Stronger yuan mainly due to US dollar depreciation – People’s Daily Online.