A key step in economic restructuring

Back in July 2005, the Chinese economy was in the third year of high growth following two years of double-digit growth; the country's foreign exchange reserves topped 700 billion U.S. dollar at the end of June as a result of galloping trade.

The economy, though showing no sign of a slowdown, was challenged by a sudden surge of trade disputes with other countries. This followed a pick-up in trade surplus growth and increasing criticism accusing China of being a big consumer of the world's resources such as cement and steel.

"Many problems confronted with the Chinese economy should be blamed on the delayed adjustments of the export-oriented policies and the slow progress in the exchange policy reform," Wu Jinglian, a leading national economist, said later in the year at a forum.

China's currency was maintained at a fixed rate against the dollar before the 2005 revaluation.

"The exchange rate of the yuan against the dollar had hardly responded to the rising power of the economy in eight years from 1997 to 2005," Zhou Qiren, a Peking University economics professor, recalled.

The undervalued currency had led to increasing demands for Chinese labor, the country's growing appetite for resources and raw materials, he said. "That's how problems of the current economy originated."

In July, the country ended the currency's peg to the dollar to adopt a more flexible exchange rate mechanism. Since then, the yuan's reference rate has been set against a currency basket that also includes the euro, yen, won and British pound.

The news was applauded by many countries including the United States, the United Kingdom, Japan and the Republic of Korea, given China's rising power.

Statistics showed China's GDP rose to 3.28 trillion U.S. dollars in 2007, up from 216.5 billion U.S. dollars in 1978 when the country's initiated its opening-up reform.

The country is now the fourth largest in the global economy, the third largest trading nation and the world's biggest holder of foreign exchange reserves.

Since the revaluation, the country had gradually furthered its exchange reform to allow the market to play a bigger role.

These measures included widening the floating band of currency against the dollar and other major currencies on the spot market and relaxing controls on foreign exchanges held by individuals and companies.

Rising purchasing power for Chinese

The yuan exchange rate has become a hot topic among the public over the past three years since the currency began to appreciate against the dollar, in contrast to the lukewarm response back in 2005.

This was a result of Chinese citizens getting more involved with the outside world to purchase imported products or to go abroad to study and travel; a rising yuan meant bigger purchasing power for them.

National Tourism Administration statistics showed that about 40.95 million Chinese went abroad last year, 32 percent more than in 2005. A bigger proportion of people were also traveling for pleasure, instead of on business trips.

The rising yuan against the Hong Kong dollar also created a shopping craze among mainland tourists to the Special Administrative Region; Hong Kong residents, in tandem, became enthusiastic about holding yuan deposits.

Restructuring pain

The exchange reform would no doubt promote the country's economic restructuring, or the industrial upgrading and a shift from the heavy reliance on resources and energies for growth.

But exporters suffered as less orders came in and profit margins were squeezed.

Since last year, quite a few exporting companies in the manufacturing hub of the Pearl River Delta area, especially labor-intensive textile producers, went bust or were forced to find new locations.

The rising yuan was cited among reasons that also included increasing labor costs, higher taxes and industrial upgrading.

However, the process seems inevitable, as seen in other countries, which naturally saw their currencies rise in value after years of growth.

"The rising pressure has urged companies to cope with the new situation. They have to improve their competitiveness by emphasizing on technologies and brand-making to produce high value-added products," said Du Yuzhou, the China National Textile and Apparel Council head.

Some had managed to survive by improving production. New Century Shippingbuilding Co., Ltd in Jiangsu Province, for instance, reduced its production cycle from building a vessel in 158 days in 2006 to the current 97 days to outperform others.

Many companies also sought ways to avoid risks from a rising currency, such as switching the currency in which payment would be made and splitting orders of a long period into smaller ones.