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FOREX – Why The Yuan Could Keep on Rising Against The Dollar

Discussion in 'Company Articles' started by Forex News Now, Aug 15, 2011.

  1. Forex News Now

    Forex News Now ForexNewsNow Representative

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    NEW YORK (ForexNewsNow) – China’s central bank announced on Friday it’s intention to maintain a relatively stable exchange rate, but the announcement has not been enough to calm the speculation that Beijing would consider letting the Yuan rise further to better contain inflation in China.

    In its quarterly report, the People’s Bank of China (PBOC) announced that it would employ “many tools” including interest rates, exchange rates and bank reserve requirements in its attempts to control inflation in the country.

    The Bank also stated it would attempt to maintain the exchange rate of the Yuan at a “reasonable and balanced level.”

    “Price stabilization is not yet firm enough and the situation is not optimistic,” admitted the PBOC. Beijing is regularly subjected to international pressures, including from the United States and the International Monetary Fund, to allow the Yuan to appreciate faster.

    The Yuan stabilized on Friday at around 6.39 to the dollar on the spot markets, pausing after a sharp rise this week.



    Yuan at record high against dollar

    In July, China’s exports were more robust than expected, rising by 20.4% year on year. The announcement of this acceleration on Wednesday, which occurs after an increase of 17.9% in June, pushed the Yuan to 6.4170 against the dollar Wednesday, a new record high against the US dollar.

    However, quick appreciation is not likely in the longer term because of the pressure to sustain exports and battle an inflow of speculative capital, or hot money, from abroad, analysts said.

    Shi Weiyan, a senior trader at Bank of China, said that “the jump in the exchange rate was a bit surprising but it was well accepted by the market during trading.”

    The currency is currently only allowed to trade up to 0.5 percent on either side of the official exchange rate, and it is important to notice that “only few bets were made above 6.40 against the US dollar,” Shi said.

    The Yuan had already appreciated about 6.7% since it was de-pegged from the dollar (for the second time) in June 2010 and 3% since the beginning of the year.



    What Are Chinese Economists Saying?
    Overall China experts share a positive view of the People’s Bank of China decisions to allow the Yuan to appreciate. Below is a selection of excerpts from leading market analysts on the Chinese central bank’s decision to make the Yuan’s exchange rate more flexible.
    - ”The PBOC announcement Saturday is of great significance. This ended the fixed Yuan exchange rate policy adopted amid the financial crisis during the past over 20 months. This marks the beginning of a new era,” said Li Daokui, member of POBC’s monetary policy committee.
    - “We believe this is a positive gesture. We have long held the view that de-pegging from the [dollar] and moving to a more flexible exchange rate regime is the right thing for the Chinese government to do, not the least because of the foreseeable trade protectionist pressures,” added Helen Qiao from Goldman Sachs.
    - “Don’t expect sudden, sharp movement in the Yuan exchange rate. The Yuan movement will be gradual based on market principles,” warned Xia Bin, member of People’s Bank of China monetary policy committee.



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  2. Pharaoh

    Pharaoh Colonel

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    I'm still trying to figure out how China can have significant inflation while holding their undervalued currency down.

    This means that the RMB is losing value inside of China while gaining value against most other currencies at an artificially low rate. I'd say that either something is wrong with this equation or else the rest of the world is going down the tubes even faster than it appears to be.
     

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