By Xin Zhiming (China Daily)
Updated: 2007-05-22 06:53

The renminbi might never have been as much in the news as it has been on the run-up to the second round of the strategic economic dialogue between China and the US, which is set to start today.

The US side has been pushing China to revalue its currency - and at a faster pace.

The yuan has appreciated by about 5.7 percent since it was revalued by 2.1 percent and de-pegged from the US dollar in July 2005.

And the pace of appreciation seems to have accelerated in recent weeks.

Since the start of this month, the renminbi's central parity rate has moved steadily past the 7.7, 7.69, 7.68 and 7.67 marks. The rate of change has been faster than at any time in previous months.

The central bank on Friday further widened the daily trading band for the yuan from 0.3 percent to 0.5 percent, allowing more room for fluctuations.

Following the adjustment, Goldman Sachs predicted that the yuan's rate of appreciation could reach 9 percent in the coming 12 months.

"In terms of China's strategic target, the yuan will become freely exchangable in the long term," said Zhao Xijun, a finance professor at the Renmin University of China.

Nearly two years after the landmark reform of the yuan's exchange rate, the pace of revaluation has picked up, which shows that the renminbi is becoming more flexible, Zhao said.

China has been laying the groundwork for a more freely floating yuan in recent years.

It introduced the market maker system last year in the foreign exchange market to make the market better able to accommodate bigger fluctuations in the yuan's value, he said.

It has also introduced more foreign exchange tools and products to resolve risks created by wider yuan fluctuations, Zhao added.

"As a result (of these actions), the recent fluctuations of the yuan have not had much of a negative impact on the market and the economy," he said.

Economists have warned, however, that a drastic yuan revaluation could pose a serious risk given China's status as a developing economy and its weak financial system and vulnerable exports sector.

"Chinese banks and export companies are weak when it comes to warding off foreign exchange risks," said Liu Xiahui, an economist with the Chinese Academy of Social Sciences.

Banks are too inefficient, he added.

And exporters may be slow to react to foreign exchange fluctuations because they are used to operating in a fixed foreign exchange environment, said Zhao.

Uncertainties are to be expected as China transforms its mode of economic growth, he said.

Drastic changes in the country's foreign exchange regime could exacerbate such risks, he said.

"The yuan's revaluation process, therefore, must be stable and gradual," said Zhao.

The yuan is not the only factor affected by the balance of exchange rate, Fan Gang, member of the Monetary Policy Committee of the central bank said recently.

The global trade imbalance is one of the main reasons the US has been pushing for a more valuable yuan, but if the US keeps printing excessive amounts of US dollars, the imbalance will never be corrected, he said.

Economists and policymakers from both sides should come to a consensus on a reasonable level for the yuan, Zhao said.

"In the process, they must take into consideration the interests of both sides," he said.

(China Daily 05/22/2007 page5)