The exchange rate of Renminbi, the Chinese currency, is expected
to appreciate by some five percent to one US dollar for 7.44 yuan,
according to Xinhua Economic Analysis Report released Monday.
The report projected that the pace of RMB appreciation would be
faster in the first half of 2007 than in the second half.
Xinhua Economic Analysis Reports are regular products by a team
of 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 US 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 predicted
a 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 enough
to allow sufficient appreciation of the RMB, according to Chinese
economist Fan Gang.
However, some economists argue 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 US dollar.
China raised the value of yuan by two percent to 8.11 per US
dollar and started linking it to a basket of currencies on July 21
of 2005, and allowed it to move 0.3 percent above or below the
parity rate against the US dollar.
The report also projected that the country's gross domestic
product (GDP) will grow by 9.5 percent, lower than the estimated
10.5 percent for 2006. Major reasons for the slowed pace include
the decline of global economic growth and the Chinese government's
tighter macro-economic control aimed to curb overheated sectors
such as investment and housing.
It forecasts that fixed asset investment will increase by 25
percent, compared with the estimated 26.6 percent growth for 2006.
However, the report cautioned that investment can easily rebound
for reasons of liquidity surplus, fast growing corporate profits
and local governments' investment impulse.
The growth of fixed asset investment and credit both slowed down
in 2006 as a result of hikes in the benchmark lending interest
rate, which was increased from 5.85 to 6.12 percent.
It will be less necessary for the central bank to further raise
interest rates in 2007, as too fast declines of investment growth
will be no good to an anticipated slack in economic growth, but the
possibilities of interest rate drops are even smaller, says the
report.
The Chinese government has been trying to curb runaway
investment to let consumption contribute more to economic growth,
with measures to stimulate domestic demand such as improving the
social security system, raising minimum wages and protecting the
interests of migrant laborers.
Domestic consumption will grow faster in 2007, with retail sales
of consumer goods to rise 15 percent year on year, the report
predicts. The number is estimated to be 13.7 percent for 2006, 0.9
percentage points up from 2005.
(Xinhua News Agency January 2, 2007)