Monday, January 14, 2008

Forecast for Chinese Yuan

Officially the Chinese do not believe in revaluaing the Yuan, amongst other things, the political leadership seem hesitant to appear giving in to US demands. But, in practice and unofficially, the Yuan is steadily but surely appreciating in value.

Furthermore, despite recent appreciation's approaching 20% in value since 2005, there are very good reasons to expect the Yuan to keep rising in 2008 and probably beyond.

The reason for the forecasted rise in the Yuan includes several factors.

Inflationary Pressures in Chinese Economy.

The Chinese monetary (and political) authorities are increasingly worried about overheating in the Chinese economy. With economic growth close to 10% it is hardly surprising that inflation has started to creep up, reaching 6.9% last year. An appreciating exchange rate is an effective method to slow down growth. It makes exports more expensive and reduces demand in the export sector.

Chinese Trade Surplus.

Despite modest rises in the exchange rate, there has been no reduction in the size of the trade deficit. With all this surplus foreign country it is increasingly difficult to keep the exchange rate down. In the past the Chinese bought large amounts of dollar securities. They are still doing this, but with US interest rates falling and Chinese interest rates rising, it is becoming less attractive. Also the weakness of the dollar is discouraging a further build up in US Assets.

Last year the US current account surplus rose from 4% of GDP in 2004 to 11% of GDP. Although a trade surplus is not directly related to currency valuations, it nevertheless is a reflection of the imbalances in the Chinese economy, which could be reduced by a revaluation.

Dollar to Yuan Exchange Rate Forecast

When the Dollar / Yuan peg was dropped the Yuan stood at 8.26 to the Dollar.
In the beginning of 2008 it has fallen to 7.27

  • Stephen Green, head of research in China for Standard Chartered, predicts the Yuan will rise further to 6.17 by the start of 2009.

Whilst other investment firms share this bullish outlook for the Yuan, it remains to be seen how much the Chinese government will be willing to alter its stance to the currency. despite concerns about inflation, it is still perhaps more concerned about unemployment and inequality. It holds a deeply cherished belief that an undervalued Yuan is essential for a strong economy.

Whilst, a revaluation of the Yuan may help both China and the rest of the world in dealing with surplus, there is still no guarantee it will occur.

One thing is very likely - in the long term the Yuan will continue its remorseless upward appreciation. - Expect more Chinese students wishing to take advantage of UK and US education


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