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May 28, 2017

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RMB to appreciate no more than 4% against US dollar

BEIJING -- China's RMB, or yuan, is expected to appreciate at a slower pace of no more than 4 percent against the U.S. dollar in 2012 on worries of worsening exports, which used to be one of the main driving forces for China's robust economic growth.

The RMB appreciated 5.11 percent against the U.S. dollar in 2011 with the real effective exchange rate index rising to an all-time high of 107.97.

The upward trend has continued into 2012, taking the greenback for the first time down to the 6.2 range against the yuan. However, the slowdown of export growth is likely to press on the rise of the RMB exchange rate.

Why is Appreciation Expected?

The RMB is expected to continue to appreciate against the U.S. dollar as it may help accelerate the internationalization of the yuan and ease China's import-dominated inflation risks so as to relieve China of the pressure of lower purchasing power.

The internationalization of the RMB has sped up its pace ever since the debut of the first RMB-dominated bond in Hong Kong in 2007. But little progress has been made until now as the U.S. dollar remains the most widely recognized option as a reserve currency.

However, the financial crisis and the eurozone debt crisis may give the yuan a chance to break the impasse as both the U.S. dollar and the euro have been depreciating amid the crisis, driving other countries to consider restructuring their foreign reserves to reduce losses from exchange rate fluctuation. Therefore, the expected appreciation of the RMB and its steady value will surely attract other countries to eye it as an option for the reserve.

Countries such as Malaysia and Nigeria have already introduced RMB-dominated assets into their foreign reserves considering that the RMB is on the upward trend and the value of the yuan is relatively steady.

Encouraging the appreciation of the RMB has also become one of the main monetary policies for the central bank to rein in domestic inflation pressure as the degree of correlation between the nominal effective exchange rate of RMB and the consumer price index is estimated at around negative 68 percent.

The RMB appreciated by 3 percent in 2010 when China resumed its foreign exchange rate reform and further rose by 5.11 percent in 2011. During this period, China's imported inflation had been eased effectively and the domestic inflation dropped from 6.5 percent to 4.5 percent.

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