BEIJING - Ahead of
US Treasury Secretary Henry Paulson's three-day
visit to China beginning on Monday, some
Chinese economists are warning of the risks of the
yuan's continued appreciation as it hit a record high
against the US dollar on Wednesday. When he meets
with President Hu Jintao and other top Beijing
officials, Paulson is expected to press China for
great flexibility of its currency.
The yuan stood at 7.5596 to
the dollar on Wednesday, up 129 basis points from
Tuesday's 7.5725.
It is the 54th time that
the yuan's value hit a record this year, and
also
the highest rate since the yuan was revalued by
2.1% from 8.28 to the dollar in July 2005.
This week, the US Senate Finance Committee
scheduled a vote on legislation that seeks to
sanction China for its currency policy, which US
manufacturers say is undervalued by as much as
40%. That makes it cheaper for Chinese products to
be sold in the United States and more expensive
for US products sold in China.
On
Wednesday, the central parity rate of the yuan
against the euro went up 352 basis points from
Tuesday's figure to stand at 10.4368, while yuan's
value against the Japanese yen gained 240 basis
points to 6.3031 yuan against 100 yen.
Analysts said the quicker pace of the
yuan's appreciation was closely related to the
central bank's announcement to raise the benchmark
interest rates last Friday.
Some Chinese
economists are worried that the yuan's continued
appreciation will attract more speculative funds
into the country and worsen the excessive
liquidity problem faced by the government.
Tan Yaling, a research analyst with the
Bank of China, has warned that the continued rise
of the yuan may adversely affect the country's
economic and financial security, with the yuan
rising at a faster pace than previously since the
beginning of this year.
The Chinese
currency rose in small steps during the first year
after the central bank dropped the peg to the US
dollar in July 2005 and linked the yuan to a
basket of foreign currencies.
The driving
force behind the yuan's appreciation then was
economic growth itself and the progress in the
financial sector, said Tan. However, in 2006 and
2007, the appreciation of the yuan picked up
speed, and became a focus for global investors and
speculators.
Meanwhile, the yuan's rise is
becoming more closely related to the performance
of the US dollar. The central parity price of the
yuan rises against the weak dollar, and the
pressure of appreciation should be relieved when
the dollar rebounds.
China's central bank
announced in May that it would allow the yuan to
fluctuate against the US dollar by 0.5% a day, up
from the previous 0.3%, in a bid to make the
currency more flexible.
The real value of
the yuan has gone up by 4.41% since it was
revalued in July 2005, according to the latest
statistics from the Bank for International
Settlements.
The accelerating pace of yuan
revaluation and the amounting pressure for yuan
appreciation are independent of the country's
monetary policy, said Tan, adding that the trend
might be going against the real situation of the
Chinese economy.
Many, including US
Federal Reserve chairman Ben Bernanke, said the
yuan appreciation was in China's interest. But Tan
said people such as Bernanke have focused too much
on the price of the currency and ignored the
structural problems of China's economy and its
financial sector. The Chinese economy is still at
the low end of a market economy, compared with the
more developed economies to which the yuan is
linked, in terms of technologies, production
efficiency, industrial development and
consumption, she said.
The country would
face great risks with a strong yuan in the long
run if it failed to improve the quality of its
economy to support the currency, Tan warned. She
said she is worried that a stronger yuan would
reduce or even eliminate the profits of China's
labor-intensive manufacturing sector, while
foreign investors would snatch fat profits on the
back of low-cost labor in China and become a
dominant factor in the economy.
However,
Ha Jimin, chief economist with China International
Capital Corp, argued that the accelerating yuan
appreciation may help ease trade frictions, lower
the pressure from imported inflation, and force
exporting companies to upgrade their industrial
structure.
Ding Zhijie with the University
of International Business and Economics warned
that the persistent market anticipation of the
yuan's appreciation might lead China into a trap
of attracting more liquidity for its relatively
low interest rates. Ding said the Chinese
government should try not to follow Japan's
example in the 1980s when the bubbles burst in the
real-estate sector and stock market.
Both
Ding and Ha said the pressure of appreciation will
continue because of the country's high
economic-growth rate and accumulating
foreign-exchange reserves, and predicted that the
value of the Chinese currency would rise to 7.3
yuan to the US dollar by the end of the year if
the dollar maintained its performance.
Ha
said it would at least take three years to ease
the pressure for further appreciation of the yuan.
Tan said the government should do more
research to identify the yuan's actual value and
equilibrium price to avoid risks from the yuan's
appreciation in a single direction.
Fan
Gang, a member of the central bank's monetary
policy committee, however, is against deliberately
bringing down the anticipation of yuan
appreciation, and said the yuan's revaluation
should be tied to market supply and demand.
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