New currency regime to benefit economic recovery

0 CommentsPrint E-mail Xinhua, July 19, 2010
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China's recent move in its yuan exchange rate regime is beneficial to its domestic recovery and also for the global economy, especially at a time when China's economic growth seemed to slow, economists said in Beijing.

The introduction of a more flexible yuan is an indication of the Chinese government's willingness to boost the transformation of its economic growth pattern at certain costs, and also a sign of its belief in the global economic recovery, said Wang Jun, a researcher with the China Center for International Economic Exchanges.

The People's Bank of China (PBOC), or the central bank, announced on June 19 that it decided to push forward the reform of the yuan exchange rate to add flexibility to the exchange rate. However, it ruled out a one-off revaluation.

Official data released last week showed that the world's third largest economy expanded at a 10.3-percent year-on-year rate in the second quarter, slower than the 11.9 percent growth in the first quarter and the 10.7 percent growth in the last quarter of 2009.

Hu Xiaolian, deputy governor of PBOC, said in an article published on the PBOC's web site last week that China needed to follow a managed floating of its exchange rate, which is a fundamental need for its economic restructuring and the optimizing of the allocations of its resources.

The policy would reduce China's trade imbalance and excessive reliance on exports and help sustain economic growth by relying more on domestic demand, Hu said.

A more flexible yuan would not have a particularly negative impact on China's exports, which has been one of the economy's major economic drives, but it could be a boost for the country's imports, Wang said.

"Since the new exchange rate regime is very likely to lead to a stronger yuan against the U.S. dollar, while weaker against the Euro and British pounds, China's exporters are capable of managing the mild correction in the yuan's exchange rate," said Wang Jun.

The central parity rate of the yuan was set at 6.7800 per U.S. dollar on Monday, according to data from the China Foreign Exchange Trading System. On Friday, Yuan gained to a record high against the U.S. dollar over the past five years at 6.7718.

Zhang Yansheng, a researcher at the National Development and Reform Commission, said there is no basis for the yuan to rise sharply against the U.S. dollar in the short term, therefore the fluctuation in the exchange rate would have limited impact on exporters and China's real economy.

"The exchange rate of the yuan is not the major barrier for Chinese exporters, considering other uncertainties in the country's economy," Zhang said.

Besides, as China is facing inflationary pressure, a mild appreciation of the yuan could ease imported inflation at a certain level, as the Chinese currency would have more purchasing power in the global market, he said.

China's consumer price index rose 2.9 percent year on year in June, down slightly from the 3.1 percent rise in May, which had exceeded the 3 percent full-year target ceiling the government set in March, according to official data released last week.

For the medium to long term, according to Zhang, a more flexible yuan can further boost China's production efficiency, economic restructuring and the growth of outbound investment, which was especially important in times of rising trade protectionism.

Wen Bin, a senior analyst with the Bank of China, said a stronger yuan could enhance the spending power of Chinese consumers, which would in turn benefit China's surrounding economies in east and southeast Asia, "as China imports more from these countries than it exports."

Cheng Enfu, chairman of the World Association of Political Economy, also told Xinhua that the new exchange rate regime would also benefit the global economic recovery by filling the trade gap between China and the United States and reducing the possibility of future trade wars.

"This could bring the world economy back to a healthy track and push forward adjustments of the global economic structure," Cheng said.

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