Yuan expected to fluctuate, rise more this year

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The value of the yuan will fluctuate greatly this year but ultimately appreciate by 2 percent to 3 percent against the US dollar.

That's what a Fudan University professor studying exchange rates said on Thursday.

On Wednesday, the central bank set the daily reference rate for the Chinese currency at a record high of 6.3 yuan for each dollar, before adjusting it unexpectedly to 6.31 on Thursday. In actual trading, the value of the currency will fluctuate by 0.5 percent both up and down from the reference rate.

"This year, we will defiantly see the yuan entering the '6.2 era', " said Chen Xuebin, associate dean of Fudan University's Institute for Financial Studies.

Chen said the yuan will not simply rise in value but will fluctuate in comparison to the dollar more than ever before.

Wider fluctuations, he said, will help improve China's system for setting exchange rates, lower the expectations for the yuan's appreciation and stabilize the currency's real effective exchange rate.

An effective exchange rate is a weighted average of the values of various foreign currencies and is viewed as the best way to gauge the purchasing power of a country's currency in comparison with its trading partners' currencies.

"That, in turn, will benefit Chinese exports and the yuan's independence," he said.

The value of the currency became more volatile in December, touching the bottom of its daily trading range on 12 days of the 22 trading days in that month. It also posted its biggest one-day gain of 0.4 percent on Dec 16 before attaining a record high exchange rate on Dec 27.

Chen said the yuan should be pegged to a basket of currencies instead of just to the US dollar. That's because China's current account has already become "basically balanced", and the country should shift its policy toward making the yuan's effective exchange rate stable.

China now effectively pegs its currency to the dollar. But when the country began reforming its exchange-rate system in 2005, it said it would "refer to" a basket of currencies in setting the yuan's exchange rate.

"In fact, pegging to the dollar makes the yuan's effective exchange rate more volatile," Chen said. "That hurts Chinese exports.

"So now we should peg it to a basket of currencies, instead of 'refer to' a basket."

According to an index compiled by Fudan University, the yuan's effective exchange rate skyrocketed in 2009, when the United States was deep in a financial crisis, effectively raising the price of Chinese exports.

The university also ran a simulation looking at what would have happened had the yuan been pegged to a basket of currencies over the past six years. It concluded that the currency's effective exchange rate would have stayed fairly stable.