Should China depreciate the yuan?

Chinese authorities reiterated in different occasions that the yuan should be kept at a "basically stable" level. The country's November trade statistics, which showed its exports decreased 2.2 percent year-on-year, the first fall in seven years, triggered the concern that China may depreciate the yuan to bail out exporters. But some worry a depreciating yuan will lead to outflow of capital and trade disputes.

Should the yuan continue to weaken against a backdrop of global economic uncertainty? Some experts gave their views on the website of Caijing magazine.

Yes

Steven Xu Sitao, Chief Representative of the Economist Group in China:

Letting the yuan depreciate is a good option since inflation is no longer a threat while the dollar starts a rising cycle. The dollar is unlikely to depreciate against major Western currencies and even major Asian currencies. If the yuan does not depreciate China's exports will take a big hit.

Minor changes in the value of the yuan will not help exporters much. China should set the yuan at 7.5 to the dollar, up from the current 6.8 to the dollar, to significantly boost exports.

A direct supportive policy targeted at the foreign trade sector is better than a slow-moving policy such as increasing export tax rebates. China's already huge foreign exchange reserves should also play a role in any decisions about depreciating the yuan.

Xu Gang, Managing Director of CITIC Securities:

The yuan should depreciate by at least 10 percent from the current level by the end of 2009 and China would be better off making the biggest steps in that direction from now to the end of January.

China's exports are closely related to global economic growth and are not wholly decided by the foreign exchange rate of the yuan, but the yuan's value does have bearing on the proportion of China's exports to global exports. If China's yuan remains strong its advantage in exports will be offset by low prices offered by other emerging market economies. China would pay a price in lost jobs to help employment in other developing countries.

The dollar has risen nearly 20 percent, on average, against other currencies in the past four months. The dollar accounts for about 40 percent of the currency basket the yuan is pegged to, so the yuan should depreciate at least 10 percent by the end of 2009 to keep China's original balance of trade.

The long-term option for China is to further open the renminbi bond market and accelerate the market-based pricing mechanism of the yuan, helping China step out of the global economic crisis and reducing international pressure on its foreign exchange policy.

No

Zhang Ming, researcher with the Chinese Academy of Social Sciences:

China may lose more than it gains by stimulating exports through depreciating the yuan.

The yuan's foreign exchange rate against the dollar is never the decisive factor of Sino-US trade. China's trade surplus against the US is, to a large extent, the result of structural differences in the two economies as well as the international division of labor. The yuan's appreciation has not reduced much of the country's trade surplus with the US, so depreciating the yuan would hardly increase its trade surplus with the US.

The financial crisis has plunged the US, Europe and Japan into economic recession and these three economies account for more than half of China's exports. China's exports will not increase no matter what policies China adopts to boost foreign trade as long as all three are bogged down in recession.

The financial turmoil in the international market may lead to temporary capital outflow from the emerging markets of Asia and even cause financial crises in those countries. If China depreciates the yuan substantially to boost its exports it may jeopardize its image as a major responsible developing power.

Yuan depreciation will also spark protectionist reaction in the US, especially after the new US government is sworn in. The possible trade sanctions from the US may offset any gains from yuan depreciation.

Frank Gong, chief economist, JP Morgan in China:

Dramatic fluctuation in the dollar-yuan exchange rate might convince the market that China can and will resort to using the yuan as a political tool. It would also cast doubt on the government's determination to turn to consumption-driven growth instead of over-relying on exports.

Devaluing the yuan is a risky move that could lead to a new round of currency depreciation among Asian countries, creating instability in the regional financial market. This would weaken the region's economic competitiveness, which benefits no Asian countries.

(China Daily 01/12/2009 page2)