Economy

Stronger yuan mainly due to US dollar depreciation

(Xinhua)
Updated: 2011-05-10 11:20

The US government's quantitative easing policy has caused excessive liquidity in the global market, which has encouraged other nations to demand stable exchange rates, said Chen Ye, a senior researcher with the Beijing-based Anbound Group, a private industry think tank. Therefore, China has good reasons to maintain its current monetary policies, Chen said.

China's Vice Finance Minister Zhu Guangyao said on May 6 in Beijing that China and the United States agree on the direction for yuan reform, but remain divided on the specifics.

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"China believes the objective is to deepen exchange rate reforms, while the United States is focused on the range of the yuan's appreciation," Zhu said.

US officials have argued that letting the yuan appreciate more rapidly will allow China to better control its inflation.

Analysts said that domestic inflation is another factor prompting the faster appreciation of the yuan, as prices of food, fuel and other commodities are surging in China.

Zuo Xiaolei, chief economist with China Galaxy Securities, said that the fast appreciation of yuan can lower import prices, but will increase market expectations for stable and risk-free appreciation.

This may spur an influx of international capital and offset the government's efforts to drain excessive money, Zuo said.

To prevent excess international capital from entering China, the government should eliminate expectations for stable appreciation and increase costs for speculation, said Song.

Song believes that the yuan should appreciate at "the right time" and should do so in a non-linear fashion.