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Commerce chief: Yuan's depreciation "small and normal" (12/05/08)

BEIJING, Dec. 4 (Xinhua) -- The recent depreciation of China's currency against the U.S. dollar was normal and China won't rely on a weaker yuan to boost exports, Commerce Minister Chen Deming said on Thursday.

"The recent small fluctuation of the yuan against the dollar was completely normal. I'd call it the dollar strengthening, rather than the yuan depreciating," Chen told reporters at the fifth China-U.S. Strategic Economic Dialogue (SED).

China has taken a self-initiated, gradual and controllable approach to exchange rate reform since it ended the peg of the yuan in July 2005, and the principle has never changed, the minister said.

The yuan has since gained more than 20 percent versus the U.S. dollar as a result of market forces, Chen told reporters.

The currency had been stable since mid-September, when the financial crisis that originated in the United States worsened and increasingly began to affect the world, he noted.

It will remain stable if there is no big change in the international economic environment and all countries work together to respond to the crisis, he said.

He also said there are no signs of capital flowing out of China, which is still a good destination for foreign investment. Analysts said a weaker yuan could trigger capital flight.

The yuan fell as low as 6.8845 per U.S. dollar on the over-the-counter market on Thursday morning, declining by the 0.5 percent daily limit. It is allowed to trade by up to 0.5 percent against the U.S. dollar on either side of the central parity (reference) rate.

The depreciation this week sparked speculation that China was shifting its exchange rate policy to allow the yuan to weaken to help struggling exporters and save jobs.

"The current difficulty for exports is caused by market shrinkage. I don't count on the yuan's depreciation to boost exports," Chen stated.

"We think it is too early to see the latest move as a signal of a significant change in China's exchange rate policy," Tao Wang at UBS Securities wrote in a note on Wednesday.

The reference rate has been kept stable despite the fall by the daily limit on the over-the-counter market. Analysts said this situation showed the central bank didn't want a big shift in the exchange rate policy.

Wang warned the yuan's depreciation could run the risk of leading to protectionist responses from China's major export markets and a round of competitive devaluations in neighboring economies.

The yuan had for months remained steady against the U.S. dollar until the recent retreat. But it has appreciated by about 10 percent against the trade-weighted basket of currencies since August, as the U.S. dollar strengthened significantly against other major currencies, Wang noted.

Tan Yaling, a research analyst with the Bank of China, also believed the recent movement of the yuan was "normal and rational "market behavior as the currency has gained 20 percent against the U.S. dollar since July 2005.

The depreciation will "help remove some of the market's 'one-way-bet' mentality. We had been expecting some modest yuan weakness in the first half of 2009," Standard Chartered said in a note on Wednesday.

Wang forecast the yuan's rate against to the U.S. dollar would weaken to 7.0 by the end of 2008, but it could advance again to 6.8 at the end of 2009.

But if the U.S. dollar strengthened by more than 10 percent against the currencies of China's main trading partners, the yuan might weaken by about 5 percent against the U.S. currency, she added.

 

 

 


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