Fri, Sep 02, 2005 - Page 8 News List

Revaluing the yuan is the first, small step

By Tung Chen-yuan 童振源

China allowed the yuan to appreciate by 2 percent on July 21. Over the last month, the currency's value has fluctuated, but as of Monday it had appreciated by another 0.2 percent. This move was part of a gamble by Beijing against Washington and international speculators. The impact of this gamble may be no less significant to China's future than its entry into the WTO.

From a global perspective, the yuan's slight rise did nothing to balance China's international revenues and expenditures. China's current account surplus accounted for 3 percent of GDP in 2003 and 4 percent last year, and the figure is expected to rise to 6 percent this year. Over the past two years, China's foreign reserves have accounted for 11 percent to 12 percent of its GDP, and that may go as high as 16 percent this year.

The Chinese government has not yet published the level of its foreign reserves for July. Standard Chartered Bank estimates the figure will be about US$33.6 billion, which would be 54 percent higher than the same period last year. This was much higher than an average increase of US$17 billion per month in the first half of this year.

In recent years, the People's Bank of China (PBC) has purchased foreign currency to stabilize the yuan's exchange rate, spending the equivalent of 90 percent of its base money supply to do so. The independence of China's monetary policy has been severely challenged. In the first half of this year, the increase in foreign exchange forced the PBC to almost double expenditures from the previous year, putting enormous pressure on nation's monetary policy.

Moreover, analysis conducted by foreign banks suggests that the yuan's appreciation is just a beginning, and that it could rise by a further 5 percent to 11 percent by the end of this year. On average, most expect the currency to appreciate by 6 percent, with US$1 converting to approximately 7.65 yuan. Even PBC Governor Zhou Xiaochuan (周小川) said on July 23 that the revaluation was just an initial adjustment to the currency.

Given the expectations for continued appreciation, money has flooded into China, creating significant pressure on the yuan to rise. Speculative money flowed into China at an average rate of US$5.4 billion per month in the first half of this year, but the figure jumped to US$18.7 billion in July.

The Chinese government has claimed that it will not yield to international political pressure. But the yuan's appreciation proved otherwise, and the US will continue to press China to revalue the yuan. Some US senators have already affirmed that they will propose a bill that imposes a 27.5 percent tariff on all Chinese imports next month if Beijing fails to further revalue the yuan.

Signals from China suggest that the yuan is likely to be allowed to appreciate and to float in a wider range. On July 28, PBC Deputy Governor Wu Xiaoling (吳曉靈) said the exchange rate will be decided by the market mechanism from now on, and the public should no longer expect the PBC's intervention. On Aug. 4, the PBC stated in a report that it will adjust the yuan's managed float in accordance with the market, as well as the economic and financial situation. On Aug. 15, the National Development and Reform Commission also suggested that the range of the managed float be loosened when the time is right.

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