Calls Mount for China to Temper Yuan Appreciation


China should keep the yuan fairly stable to anchor expectations about the currency's rate of climb, a prominent economist said in remarks published on Monday, adding to a growing tide of calls for it to rise more slowly.

But a separate government think-tank suggested that Beijing should let the yuan float freely, underscoring divisions in policy circles since the yuan has stabilised around 7 per dollar following several months of quickened appreciation.

Xia Bin, a researcher with the Development Research Centre, was quoted by the official China Securities Journal as saying a stronger yuan could be of only limited use in the near term in fighting inflation, which is near 12-year highs.

Meanwhile, in the absence of a developed set of foreign exchange derivatives, firms were having to combat currency risk by shortening order times, which was not conducive to the development of the export sector, Xia said.

His institute reports to the State Council, China's cabinet.

"We should take adjustment to foreign exchange policy as a key task, stabilise market expectations towards the exchange rate and give the market a relatively stable signal on the exchange rate," he was quoted as saying.

Xia's note of caution echoed comments by Zhang Xiaoqiang, vice-chairman of the National Development and Reform Commission (NDRC), the economic planning agency.

Zhang said that the rising yuan was a concern for many businesses, and recommended that the government take steps to stabilise expectations.

"Some exporters don't even want to take export orders for the third quarter because they have no idea how much the yuan will appreciate," he told a conference over the weekend.

Tough Times

The official Xinhua news agency on Monday cited textile makers as saying at a trade fair that they were losing market share because of the yuan's appreciation.

"The price of a cotton T-shirt exported to the United States is $3.8 or $3.9 now, 10 percent higher than before," Xinhua quoted Kong Liang, sales director at Zhejiang Yonglong Enterprise, as saying. "We have lost many foreign buyers."

The People's Bank of China intervenes heavily in the currency market, buying most of the dollars flowing into China in order to control the yuan's ascent.

To help tackle inflation, the central bank sought to tamp down prices by permitting the yuan to climb at an annualised rate of about 17 percent in the first quarter.

But with clouds gathering over the export sector, the rise has virtually ground to a halt in April. The yuan marked time on Monday at 7.0028 per dollar, marking a total gain of 18 percent since China depegged the currency from the dollar in July 2005.

Fan Jianping, an economist at the State Information Centre, a think-tank under the NDRC, also said last week that Beijing should break expectations of a speedy yuan rise and stabilise the currency to avoid causing mass unemployment.

However, He Fan with the Research Center for International Finance, part of the top government think-tank, the Chinese Academy of Social Sciences, offered a radically different view.

He said in a report on Monday that China should cut the yuan loose, because otherwise there would always be an incentive for speculators to bet on a further rise.

"We think that under the current circumstances, temporarily allowing the yuan's exchange rate to float completely freely can successfully stamp out the market's one-sided expectations about the yuan's appreciation," He said.