RMB Exchange Rate Might Appreciate by 5% in 2007

The exchange rate of Renminbi, the Chinese currency, is expected to appreciate by some five percent to one U.S. dollar for 7.44 yuan, according to Xinhua Economic Analysis Report released Monday.  

The report projected that the pace of RMB appreciation would befaster in the first half of 2007 than in the second half.  

Xinhua Economic Analysis Reports are regular products by a teamof more than 80 economic analysts under Xinhua Economic Information Department. The latest issue of the reports reviewed the country's ten key indices in the economic and financial sectors and made projections on possible changes in the coming year.  

In 2006, the value of the RMB rose 3.28 percent against the dollar, with an accelerating trend from 0.66 percent in the first quarter to 1.15 percent in the fourth. The central parity price closed at one U.S. dollar for 7.8141 yuan, the lowest of the year.  

The report held that the short-term RMB exchange rate will be influenced by the fluctuation between the dollar and other currencies, but in the long run, it depends on the progress of China's exchange rate reforms. Stable appreciation in small steps is generally expected.  

Earlier in December, China's State Information Center predicteda three-four percent appreciation of the yuan in 2007, while the Bank of America and Deutsche Bank expected a rise of four-six percent and 4.5 percent, respectively.  

China's foreign exchange policy is in line with the pace of China's economic development and the daily floating band is enoughto allow sufficient appreciation of the RMB, according to Chinese economist Fan Gang.  

However, some economists argued that the appreciation of the RMB is a double-edged sword, as it will make Chinese exports more expensive and therefore reduce export volume. Some export-driven small and medium companies may not be able to survive and have to lay off employees.  

"If China were coerced into really large appreciations of the RMB, it could face the same deflationary fate as Japan in the 1980s and 1990s -- and all this without reducing its trade surplus," said Ronald McKinnon in an article published Wednesday by The Wall Street Journal.  

Zhou Xiaochuan, governor of the People's Bank of China, said that there was no timetable for a further widening of the daily floating band between the RMB and the U.S. dollar.  

China raised the value of yuan by two percent to 8.11 per U.S. dollar and started linking it to a basket of currencies on July 21of 2005, and allowed it to move 0.3 percent above or below the parity rate against the U.S. dollar.  

The continuing appreciation of the RMB, a slowing world economyand the end of some tax rebates will reduce China's export growth to 20 percent year on year in 2007, the report predicted.  

From January to November of 2006, China's exports increased 27.5 percent over the same period in 2005.  
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