China Financial Daily

RMB appreciation or depreciation for the short term in 2009
News on November 12, 2009:– China would not let the yuan gain against the U.S. dollar in the short term, experts said on Thursday when commenting on the latest quarterly report of China’s central bank. People’s Bank of China (PBOC), the central bank, said Wednesday in its quarterly report of monetary policy, for the first time, that the bank would improve the mechanism of the exchange rate determination “based on international capital flows and movements in major currencies”.

“The new wording showed that China would reduce speculation and strengthen risk control in the future, but it did not necessarily suggest a change in the yuan’s exchange rate policy,” said Tan Yaling, an expert with the China Institute for Financial Derivatives at Peking University. “The future mechanism would reflect China’s own concerns and status,” she said.

China’s foreign exchange reserves surged to a record 2.27 trillion U.S. dollars as of the third quarter of 2009, up 19.26 percent year on year, PBOC reported in September. According to Yin Jianfeng, a researcher with the Chinese Academy of Social Sciences (CASS), a government think tank, it is natural for the central bank to pay more attention to increasing international capital inflows. “Excessive liquidities are pouring into China as the country is witnessing rapid recovery while the economic condition is still weak in the western world,” he said.

Zuo Xiaolei, chief economist with Galaxy Securities, said the central bank’s report indicated the government had raised concerns that such inflows would put China under huge external pressure for yuan appreciation. Zuo predicted that as the U.S. dollar depreciates further, excessive liquidity will be a global issue in future, which would in turn pull up China’s foreign reserve to a new level.

China has been facing calls to let its own currency gain against the dollar since it recovered quickly from the financial crisis, especially after it reported the positive economic data of last month, however, experts had expressed different opinions. “Sudden upward movement in the yuan would slow China’s economic growth when the country’s exports just showed signs of recovery, “Tan said, “All in all, the exchange rate policy should not be subjected to other countries but serve our own economy.” Also, the pace of yuan’s appreciation should be determined not only by the foreign trade surplus, according to Zuo Xiaolei. The balance of China’s internal development should also be taken into consideration, including the massive stimulus package and the accumulated liabilities of local governments, she said.

China’s exports slid 13.8 percent year on year to 110.76 billion U.S. dollars in October, said the National Bureau of Statistics Wednesday. The decline rate was 1.4 percentage points lower than that of September.