'Impact of stronger yuan will be small'
By Su Bei (China Daily)
Updated: 2005-07-23 07:10

The revaluation of China's currency the renminbi, or yuan, will not have much impact on the country's economy, it was agreed on Friday.

The direct impact of a stronger yuan on the economy was quite small because it appreciated only 2 per cent, said Huang Yiping, a senior economist with Citigroup in Hong Kong.

The People's Bank of China announced in a long-awaited but unexpected move on Thursday night that China would scrap the renminbi's peg to the US dollar.

A staff worker with the China Minsheng Bank counts US dollar notes in Nanjing, East China's Jiangsu Province, Friday, July 22, 2005. The People's Bank of China, the central bank, announced to scrap the yuan's decade-old peg to the U.S. dollar, and in stead phase in a flexible mechanism of the yuan exchange rates by taking into account of a basket of major world currencies.[newsphoto]

"China will reform the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies," it said.

The central bank strengthened the exchange rate to 8.11 yuan to the dollar, from 8.28 yuan. But it is unlikely to further adjust the exchange rate in the short term, Huang said.

The impact on exports will be slightly negative, he said.

China exported goods worth US$342.3 billion during the first half of this year - 32.7 per cent up from the first half of 2004 - with a trade surplus of US$39.6 billion.

The surplus contributed greatly to the country's gross domestic product, which rose 9.5 per cent in the same period.

The renminbi's appreciation will result in a combined 2 per cent drop in export growth in the next two years, said Zhu Baoliang, chief economist with the State Information Centre. That means the impact will be less than 0.5 per cent for the rest of this year, he added.

The appreciation will also have a slight impact on investment and consumption, two major engines for the national economy.

"The economic growth will drop a combined 0.5 per cent over two years starting from Friday," Zhu predicted.

Zhuang Jian, a senior economist with the Asian Development Bank's resident mission in China, agreed on the influence on exports.

Made-in-China products will become less competitive on the world market after the appreciation, thus helping reduce China's trade surplus, another important engine for the economy, Zhuang said.

The drop in exports will also influence employment.

However, he believes dropping the yuan's peg to the greenback could help improve China's foreign exchange mechanism and will help reduce trade friction.

The Chinese Government will have to speed up its reform of the foreign trade mechanism, and domestic companies will have to sharpen their competitiveness, he said.

Wang Zhao, a senior researcher with the State Council Development Research Centre, said that "in the long run, the appreciation is beneficial to the sustainable and healthy development of China's foreign trade even though it would restrict exports in the short term."

The appreciation was also good news for consumers because they can buy additional imported goods with the same amount of Chinese currency.

But it also means foreign investors will have to spend more to invest in China. This will affect the country's utilization of foreign direct investment, which had already declined by 3.2 per cent during the first half of this year, he said.

However, he added, China needs to raise the threshold for foreign investment in industries that pollute the environment and consume huge amount of energy.

"The significance of the yuan's appreciation on the economy is more symbolic than real," he said.

The move suggests that China has taken another step to become more market-oriented in both its foreign exchange system and economic development, he concluded.

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