Page 2 of 2 SUN WUKONG 'Devalue' call undermines yuan true faith
By Wu Zhong, China Editor
possible help to some export-oriented manufacturing industries, would further
fuel inflation, making the government's task a "mission impossible”.
Even with the gradual revaluation of the yuan, inflation is picking up pace.
The Consumer Price Index (CPI) rose 8.5% in April year on year, the National
Bureau of Statistics (NBS) said this week. NBS chief economist Yao Jingyuan
admitted that the government’s target to control CPI growth at 4.8% for the
whole of
this year "is quite difficult".
Technically, to make "one-step" devaluation, there must be a target. So what
target should be set for the devaluation, 7, 8, 9 or 10 yuan to one US dollar?
In 1994, when C้hina made a "one-step" depreciation of the yuan, the
official exchange rate was about 5.8 yuan to one US dollar, while the black
market rate was 8.7. Zhu Rongji, the then vice premier overseeing economic
affairs, in a bold stroke scrapped the artificially fixed official rate and
adopted the black market rate as the exchange rate for the yuan. In his view,
the black market rate reflected the true value of the currency.
Now the market tends to see the true value of the yuan as higher than the
current level. Yet Tan thinks it should be much lower, so she should at least
tell people (or the Chinese government) of the target in her mind.
Since it is a long-term trend for the yuan to continue going up provided the
Chinese government does not intervene as Tan suggests, then another question
can be raised: when will the period of yuan appreciation come to an end?
Many Chinese economists thinks the officially-fixed exchange rate of 5.7 in
1994 may now reflect the yuan's true value, after 14 years of high-speed
economic growth in the country.
"Therefore, a general view now is that the current expectation on yuan
appreciation will last until the the exchange rate of the yuan to the US dollar
goes to below 6," wrote Ding Zhijie, a professor with the University of Foreign
Economic Relations and Trade.
All this said, Tan’s report has made a good point: the Chinese government is
deeply concerned with what it sees the continuous inflow of international "hot"
money to speculate on the yuan. This further increases the pressure on yuan
appreciation. Moreover, once such speculative money begins to pull out of the
country on a large scale, there could be problems.
The amount of international "hot” money is about US$650 billion this year,
which could grow to $800 billion within 12 months, according to a recent report
by Zhong Wei, director of financial research center under Beijing Normal
University.
A better way to deal with the consequences of "hot money'' inflows than
manipulating the exchange rate was proposed in Shanghai last week by Joseph
Yam, chief executive of Hong Kong Monetary Authority. The central government,
he said, should speed up liberalization of the yuan on the capital account so
that mainland companies and individuals could freely exchange their yuan
capital into foreign currencies and make investments in overseas markets. The
subsequent outflow of funds would counterbalance the inflow of "hot” money and
effectively reduce the pressure on yuan appreciation.
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