Despite growing calls from trade partners, exchange rate flexibility will be probable only after economic conditions stabilize.
China may be facing great compulsion to widen its currency conversion band, but exporters are confident the government will not bow to pressure anytime soon.
The country’s central bank has been working to maintain a 6.80 exchange rate between the yuan and the US dollar since mid-2008 to ease the effects of the global downturn on exporters. Prior to that, the yuan had appreciated from 8.27 to the US dollar in July 2005 to about 6.83 by July 2008.
The US dollar has continued to weaken during the past several months, causing the de facto peg to drag the yuan down against other currencies such as the euro. This, in turn, has been straining trade relations between China and its key export markets, especially against the backdrop of ballooning trade deficits in favor of the former.
Even so, there is a prevailing sentiment among manufacturers that the government will keep the yuan-dollar rate stable to support the export industry, which is still struggling to recover from the economic slump. The biggest fear is that a dramatic change in the conversion ratio could transform a profitable sale into a loss in just a matter of days.
Suppliers can find assurance in official government pronouncements. Premier Wen Jiabao himself declared China would not bend to pressure from other countries to revalue. “We will absolutely not agree to the various calls pressuring us to appreciate the yuan,” Wen said in December 2009. Maintaining the stability of the yuan’s exchange rate is vital not only to China’s economic development but to global financial stability as well, the premier asserted.
Although there are signs of improvement, China’s exports have not bounced back completely. Overseas shipments for the month of November 2009 totaled $113.6 billion, lower than November 2008′s $115 billion and November 2007′s $117.6 billion. Average monthly exports from January to November 2009 were valued at $97.4 billion, compared with $119.1 billion and $101.5 billion in the corresponding periods of 2008 and 2007, respectively.
Vice Commerce Minister Zhong Shan reiterated the government’s stand at a recent press conference with Dow Jones Newswires and Bloomberg. He did say, however, that conversion margins could be broadened once economic recovery is certain.
This has led several manufacturers to temper their optimism, limiting projections of a stable yuan to 1H 2010. Most businesses, however, are unable to estimate when the currency will be adjusted and by how much. “Actually, there is no good way to anticipate the revaluation. We (exporters) just want the government to keep the exchange rate stable,” said Lionel Lau, product manager of audio speaker specialist Shenzhen Baoan Fenda Industry Co. Ltd.
But based on market research, Fujian Rich & Fine Trading Co. Ltd sales manager Anna Xiao anticipates up to 3 percent appreciation by year-end. The company produces children’s garments and shoes.
Note: All price quotes in this report are in US dollars unless otherwise specified. FOB prices were provided by the companies interviewed only as reference prices at the time of interview and may have changed. You may find the original article at Stronger yuan not likely in 1H 2010
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