Tue, May 16, 2006 - Page 12 News List

Appreciation of yuan tipped to hurt `taishang'

By Jackie Lin  /  STAFF REPORTER

China's official exchange rate yesterday broke through the psychologically key level of 8 yuan per US dollar, with analysts saying that Taiwanese businesspeople based in China (taishang) would see their hedging costs surge.

The yuan rose to its highest point since a revaluation in July last year to close at 7.9976 against the greenback yesterday on the local currency exchange.

"Although this marked a new high, the range of the Chinese currency's fluctuations against the dollar still fell short of the 3 percent band [on either side of the fixed rate]," said Chou Ji (周濟), a director at the Chung-Hua Institute of Economic Research's (CIER, 中經院) economic forecast center, in a telephone interview yesterday.

China's currency trades in a narrow range, limited to moving 0.3 percent above or below each day's parity rate. The maximum allowed movement is 3 percent versus the euro, Japanese yen and other currencies.

Chou said it was still hard to say whether the Chinese government would relax its control of the currency and allow it to continue to appreciate, as there are many factors for Beijing to consider.

A strengthening yuan would cost the export-driven country its competitive edge and dramatically boost the number of jobless people, he said. In addition, as China's financial system is not in good shape, it is expected that the giant economy could not endure the speedy liberalization of the exchange rate.

"Beijing is also concerned about its `face' and would not like to be seen to be allowing appreciation because of pressure from other nations," Chou said.

The US government's decision to not formally accuse China of manipulating its currency in a recent semi-annual report may have freed Beijing to allow the yuan to rise further, said Cheng Cheng-mount (鄭貞茂), chief economist and vice president of Citibank Taiwan Ltd.

China's economy is overheated. During the first quarter of this year, China's GDP and broad money supply, M2, grew by 10.2 percent and 18.8 percent, exceeding the expectations of the Chinese government by 2.2 percent and 2.8 percent.

"The yuan was bound to appreciate sooner or later. Now the problem is whether Beijing will speed up the pace [of those appreciations]," Cheng said.

The business model whereby some Taiwanese businesses take orders in Taiwan and manufacture in China would suffer from exchange rate losses as products exported to other nations would bear more expensive price tags, analysts said.

"There are few investment strategies that could help to avoid such losses now as the costs have run too high," Cheng said.

One possibility would be to borrow more US dollars and increase yuan assets, he said.

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