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Economists Warn of Risks of Continued Yuan Appreciation
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Chinese economists have warned that the continued yuan revaluation in a single direction may adversely affect the country's economic and financial security, as they saw the yuan kept going higher at a faster pace since the beginning of this year mainly due to outside pressure.

The Chinese currency, the yuan, had been rising 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 appreciation then was the economic growth itself and the progress in the financial sector, said Tan Yaling, a research analyst with the Bank of China.

However, in 2006 and 2007, the yuan picked up in the speed of appreciation, becoming the prey of global investors and speculators.

Meanwhile, the yuan is getting more closely related to the performance of the US dollar. The central parity price of the yuan would go up against the weak dollar, and the pressure of appreciation would be relieved when the dollar rebounded.

China is under great pressure to revalue its currency as the US blamed China's currency controls for a bulging trade gap between the two countries, saying the yuan was undervalued to give Chinese exporters an unfair price advantage.

China's central bank announced in May to allow the yuan to fluctuate against the US dollar by 0.5 percent a day, up from the previous 0.3 percent, in a bid to make the currency more flexible.

The real value of the yuan has gone up by 4.41 percent since it was revalued by 2.1 percent from 8.28 yuan in July 2005, according to latest statistics from the Bank for International Settlements.

The accelerating pace of the yuan revaluation and the amounting pressure for the 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 the US Federal Reserve Chairman Ben Bernanke, said the yuan appreciation was in the interest of China.

They have too much focused on the price of the currency and neglected the structural problems of the country's economy and its financial sector, Tan said.

The Chinese economy is still at the low end of market economy, compared with the high-end 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 by then, Tan warned, urging the government to be alert and take precautions against the risks.

She was worried that the stronger yuan would cut or even wipe off the profits of China's labor-intensive manufacturing sector, while the foreign investors would snatch fat profits on the back of low-cost labor in China and become a dominant factor in the Chinese economy.

Ha Jimin, chief economist with China International Capital Corporation, argued accelerating yuan appreciation may help ease trade frictions, lower the pressure from imported inflation, and urge exporting companies to upgrade its industrial structure.

Professor Ding Zhijie with the University of International Business and Economics warned the persistent anticipation might lead China to the trap of attracting more liquidity for its relatively low interest rates.

He noticed that market anticipation of yuan appreciation persisted, though the currency kept going upward and the exchange rate formation mechanism became more market-oriented.

Ding said the Chinese government should try not to follow Japan in the 80s, which failed to correct the appreciation anticipation and fell victim to bubble bursts in the real estate sector and the stock market.

Both Ding and Ha said the pressure of appreciation would continue due to the country's high growth rate and accumulating forex reserves, and predicted the value of the Chinese currency would rise to 7.3 yuan to US$1 at 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.

The Chinese government should do more research to identify the real value of yuan and the equilibrium price of the yuan in order to avoid risks from the yuan appreciation in a single direction, Tan said.

Fan Gang, a member of the central bank's Monetary Policy Committee, however, was against deliberately bringing down the anticipation of the yuan appreciation, and said the yuan's revaluation should keep to the mechanism of market supply and demand.

(Xinhua News Agency July 25, 2007)

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