Chinese exports are recovering, but it is still not the right time to let the yuan rise, a senior government economist says, stressing that appreciation must be a long process.
Long Guoqiang, head of the foreign economic research department in a powerful think-tank under the Cabinet, said the yuan is undervalued — a rare admission from officials — but added that a big, sudden rise would be a bad idea.
"Although there are expectations abroad for yuan appreciation and China's trade has clearly been recovering, I still do not think that now is a good time for appreciation," the economist with the Development Research Centre told Reuters.
Many in the market have assumed that China will want to see several consecutive months of strong exports before allowing the yuan to resume the gradual path of appreciation that it followed over three years until mid-2008.
But a 17.7 percent rise in exports in December went well beyond the most optimistic projections, fueling speculation about when Beijing might let the yuan edge up again, having effectively pegged it at 6.83 to the dollar for the duration of the global financial crisis.
"The main factors influencing exchange rate policy are foreign trade and the government's macro-economic management. At present, there is far greater certainty about China's macro-economic management than about foreign trade," Long said.
Protectionism was rising and uncertainties about external demand were persistent, so stable export and exchange rate policies were very important for Chinese firms, he said.
Whether talking about China or the world, it was still important to recognize that the post-crisis economy was not on solid ground, he said.
From a longer-term perspective, Long said the Chinese currency would eventually need to strengthen, albeit gradually.
"The yuan's nominal exchange rate really is undervalued, but this does not mean it has to immediately be adjusted," he said, noting that it was normal for currencies in developing countries to be undervalued and those in developed countries to be overvalued.
"Appreciation is a very long process. If it was to rise by a large amount, that would be a huge blow to the economy," Long said.
The United States, the European Union and the International Monetary Fund have all called on China in recent months to let the yuan rise as a core part of efforts to reduce imbalances in the global economy, as a stronger exchange rate would probably eat into China's yawning trade surplus.
Beijing has been defiant in response, saying that foreign demands for the yuan to appreciate were tantamount to attempts to stifle the country's growth. Long said that economic imbalances will naturally be ironed out.
"Judging from the current momentum, (Chinese) import growth will exceed export growth this year. This is good for the pursuit of more balanced trade and a reduced surplus," he said.
He forecast that Chinese exports would rise by more than 10 percent this year and that import growth would be even stronger on the back of rising commodity prices and China's surging domestic demand.
The market expects the yuan to rise 3.25 percent over the next 12 months, according to the pricing of offshore forwards. That is largely consistent with a Reuters poll last week, which forecast that the bulk of appreciation would come in the second half of the year.
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