Yuan yet to see equilibrium after 21% rise exactly 3 years after revaluation

The yuan, the Chinese currency, has appreciated more than 20 percent against the greenback since the country dropped its peg to the U.S. dollar with a one-off two-percent revaluation exactly three years ago. (File Photo)
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BEIJING, July 21 (Chinese media) -- The yuan, the Chinese currency, has

appreciated more than 20 percent against the greenback since the country dropped

its peg to the U.S. dollar with a one-off two-percent revaluation exactly three

years ago.

The central parity rate of the yuan, or renminbi (RMB), was set at 6.8271

yuan against the dollar on Monday after peaking at 6.8128 last week, according

to the China Foreign Exchange Trading System.

Both represented a 21 percent rise against the dollar compared to 8.2765

yuan per dollar before the de-pegging, announced on July21, 2005.

Let's see what's ahead as well as the route of the yuan's appreciation over

the past three years and its impact on the economy and normal people. 　

TO RISE, OR NOT TO

Many critics from outside China said the government had kept the currency

undervalued by at least 20 percent to give its exporters an advantage in the

world market, when the country took the move.

With the yuan now nearing 6.8 yuan against 1 dollar, analysts started to

ponder on the equilibrium prices of the yuan, especially as the national economy

slowed in the first half, and anticipation for the yuan's continued bilateral

appreciation began to ebb.

Many believed the yuan would continue its upward motion in the near term,

but there may be expectations for its depreciation as early as the end of this

year.

They said the yuan's exchange rate was gradually approaching its

equilibrium and could eventually become a truly flexible currency moving in both

directions.

"Market expectations for the yuan's further appreciation have apparently

eased," said Liu Dongliang, a China Merchants Bank analyst.

He noted the five-year future prices for the yuan already indicated a

depreciation from the three-year and four-year prices on the forward market.

However, "no one can tell the exact equilibrium price," said Lu Zhengwei,

chief economist of the Fujian Province-based Industrial Bank.

"Theoretically speaking, one can tell from figures like international

payments to see whether the exchange rate reflects the true value of a

currency," Liu said. But the exact equilibrium was hard to trace, and it could

be a dynamic equilibrium instead of a static one, he added.

Ha Jimin, China International Capital Corporation chief economist, believed

conditions of the equilibrium could be found in trade figures.

He said the equilibrium would strike when trade came to account for about 3

percent of the country's gross domestic product (GDP). China's trade, at

present, contributed about 5 percent of the GDP.

He said the yuan would continue to rise but at a slower pace in the second

half; its depreciation might emerge when the dollar reversed its sliding trend

in the first half of next year at the earliest.

Lu, however, said the equilibrium might come at an earlier time, or at the

end of this year, as the slowing economy may dampen market expectations.

The latest statistics showed China's GDP rose 10.4 percent in the first

half over the same period last year, 1.8 percentage points lower than the first

half last year.

Both Lu and Ha put the annual rise of the yuan at around 10 percent this year, or at around 6.6 yuan per dollar. The currency had so far risen nearly 7 percent since the end of last year.

　　A KEY STEP IN ECONOMIC RESTRUCTURING

Back in July 2005, the Chinese economy was in the third year of high growth

following two years of double-digit growth; the country's foreign exchange

reserves topped 700 billion U.S. dollars at the end of June as a result of

galloping trade.

The economy, though showing no sign of a slowdown, was challenged by a

sudden surge of trade disputes with other countries. This followed a pick-up in

trade surplus growth and increasing criticism accusing China of being a big

consumer of the world's resources such as cement and steel.

"Many problems confronted with the Chinese economy should be blamed on the

delayed adjustments of the export-oriented policies and the slow progress in the

exchange policy reform," Wu Jinglian, a leading national economist, said later

in the year at a forum.

China's currency was maintained at a fixed rate against the dollar before

the 2005 revaluation.

"The exchange rate of the yuan against the dollar had hardly responded to

the rising power of the economy in eight years from 1997 to 2005," Zhou Qiren, a

Peking University economics professor, recalled.

The undervalued currency had led to increasing demands for Chinese labor,

the country's growing appetite for resources and raw materials, he said. "That's

how problems of the current economy originated."

In July, the country ended the currency's peg to the dollar to adopt a more

flexible exchange rate mechanism. Since then, the yuan's reference rate has been

set against a currency basket that also includes the euro, yen, won and British

pound.

The news was applauded by many countries including the United States, the

United Kingdom, Japan and the Republic of Korea, given China's rising power.

Statistics showed China's GDP rose to 3.28 trillion U.S. dollars in 2007,

up from 216.5 billion U.S. dollars in 1978 when the country's initiated its

opening-up reform.

The country is now the fourth largest in the global economy, the third

largest trading nation and the world's biggest holder of foreign exchange

reserves.

Since the revaluation, the country had gradually furthered its exchange

reform to allow the market to play a bigger role.

These measures included widening the floating band of currency against the dollar and other major currencies on the spot market and relaxing controls on foreign exchanges held by individuals and companies.