Yuan expected to appreciate
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The yuan is expected to resume appreciating early next year as a more valuable currency can counter inflationary pressure and stimulate domestic consumption, economists said.
The local currency has been flat against the United States dollar at about 6.83 since the middle of last year. Economists called it a "re-peg to the US dollar" after China de-pegged the yuan from the greenback in July 2005.
However, with the global economy recovering since the second half of this year, expectations are growing that the yuan will appreciate as the currencies of other emerging economies have risen against the weaker US dollar, said Xie Dongming, an OCBC Bank economist.
Alaistair Chan, a Moody's Economy.com associate economist, said that as Chinese producers are forced to spend more for fuel and other imported commodities, a stronger yuan is in China's own interest.
"Encouraging US exports and stimulating Chinese consumption through a stronger yuan and weaker US dollar seems a necessary, though not sufficient, precondition to reducing global imbalances," he said.
China is trying to shift its economic growth momentum from a reliance on exports to domestic consumption.
China's loose monetary policy and its record high credit are expected to fuel inflationary pressure at some point although it is not an immediate issue, economists said.
When inflation turns positive, the government may find domestic producers supporting a rise in the yuan to lower import costs.
Chan said he expects the yuan to appreciate gradually once the central government is assured of a recovery in exports and on clear signs that global financial turmoil is over.
The government likely needs to see exports grow in year-on-year terms before it allows any further upward movement in the yuan to placate domestic exporters, economists said.
Citi economist Shen Minggao said he expects the yuan to resume appreciating against the US dollar early next year. He forecast the yuan will rise 4 percent versus the US dollar next year.
"Expectations for appreciation may accelerate, but policymakers are in no hurry given weak external demand and overcapacity," Shen said.
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