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The yuan's speedy appreciation

(China Daily)
Updated: 2008-01-16 14:00

China's currency, the yuan, has hit a new high against the US dollar for the sixth time since the beginning of this year. By breaking the 7.25 mark against the US dollar yesterday, the yuan has kept smashing psychological barriers for three trading days in a row.

Such quickened revaluation seemingly underscored the Chinese government's determination to rein in domestic price hikes.

If so, Chinese exporters must expedite their restructuring to cope with the substantial impact of faster appreciation of the yuan on their bottom lines.

The yuan already advanced about 7 percent against the US dollar in 2007, twice as fast as in 2006.

Yet, against all the odds of a rising yuan and overseas safety concerns over Chinese exports, the country still registered a trade surplus of $262.2 billion last year, up 47.4 percent over the previous year.

The resilience of China's export sector is surely impressive. It even might have allowed the policymakers to be more concerned about domestic inflation rather than worrying too much about the pressure of faster appreciation on exporters.

China's consumer price index has hovered above 6 percent year-on-year for four months, driving consumer inflation to 4.6 percent for the first 11 months of 2007.

Though double-digit growth of food prices remained the major driving force of consumer inflation, emerging signs of continuous price hikes in many non-food sectors have persuaded the Chinese authorities to make it a top priority to fight overall inflation this year.

Under such circumstances, it looks reasonable to strengthen the Chinese currency to fight domestic inflation pressures now.

It is believed the yuan's rise will help reduce the country's massive trade surplus, mop up excess liquidity and curb inflation.

The latest acceleration in the rise of the yuan might be just the beginning of the country's efforts to narrow the trade imbalance while better meeting domestic demand with more imports.

However, it is obvious that the prospect of a stronger yuan will further erode profit margins for many Chinese exporters.

Their success in the past two years to cope with a gradual rise of the yuan can hardly be enough to guarantee their survival this year. The new challenges Chinese exporters have to face include not only a more expensive local currency but also stringent environmental standards, rising wage levels, and weakening external demand.


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