Yuan Gains to Slow in Second Half, Researcher Says

By Judy Chen

July 23 (Bloomberg) -- China will slow the yuan's gains to about 3 percent in the second half of the year to help exporters weather a decline in global demand and rising costs, said Zhang Ming, a researcher at the Chinese Academy of Social Sciences.

The yuan appreciated 6.6 percent against the dollar in the first half, extending its advance to 21 percent since its fixed exchange rate was scrapped in 2005. The strengthening currency has slowed growth in overseas shipments, which expanded by the least in four months in June. Premier Wen Jiabao pledged to keep trade policies stable to help exporters during his visit to Guangdong province from July 19 to July 20.

``The fast appreciation has drawn opposition from exporters and some government departments,'' Zhang said in an interview from Beijing. ``The government will slow yuan gains as bankruptcies rise in coastal provinces.''

China's currency will advance 10 percent during 2008, said Zhang, who writes articles on the yuan for the Web site of CASS, the government's principal research institute on the economy. That would bring it to 6.64 per dollar by the end of the year. The yuan fell 0.1 percent to 6.8288 per dollar in Shanghai today as of 11:28 a.m., from 6.8217 yesterday, according to the China Foreign Exchange Trade System.

Zhang's forecast is similar to that of traders. Non- deliverable forward contracts, which allow investors to lock in a value for the currency in the future, show the market is betting on a 2.9 percent advance to 6.6385 in six months.

The yuan will reach 6.64 per dollar by year-end, according to the median estimate of 28 analysts surveyed by Bloomberg News.

Textile Exports

The Ministry of Commerce has urged the cabinet to slow yuan appreciation and raise tax rebates to boost exports, an official at the ministry said on July 14. The official declined to be identified because he isn't authorized to speak to the media.

Two-thirds of textile manufacturers weren't profitable in the first five months of this year, Du Yuzhou, President of China Chamber of Commerce for Import and Export of Textiles, said at an industry conference in Shanghai on July 15.

Cuts to export incentives for polluting and resource- intensive industries were the main reason for the slower export growth in the first half, Gao Hucheng, vice minister of commerce, said yesterday at a press briefing in Beijing. China's export outlook is ``very positive'' for the second half, said Gao.

``The exchange rate is one of the tools to protect exporters but not the only tool,'' said Zhu Baoliang, chief economist at the State Information Center in Beijing, an affiliate of China's top economic planning agency. ``There's still much upward pressure on the yuan within a year.''

Undervalued Currency?

The yuan remains undervalued and China needs to let the currency rise further, Morris Goldstein and Nicholas Lardy, senior fellows at the Peterson Institute for International Economics, wrote in the Financial Times today. China should accelerate the pace of yuan appreciation and move away from relying on investment and its trade surplus for growth, Goldstein and Lardy wrote.

Luxembourg Finance Minister Jean-Claude Juncker, who chairs a group of counterparts from the euro region, said on July 9 he will bring the attention of Chinese leaders to the fact that the euro is ``too strong'' against the yuan. China's currency has fallen 7.3 percent versus the euro since the end of the exchange rate, and dropped 0.5 percent this year.

The adjustment in the pace of the yuan's gains won't halt its appreciation or stop the central bank from improving the balance of payments, Zhang said. China's trade surplus narrowed 20.6 percent to $21.4 billion in June from a year earlier, the third straight reduction, the government said July 10.

``A smaller trade surplus is what we are trying to achieve in this exchange-rate reform,'' said Zhang. ``We can't give it up just because of the current difficulties. Too many resources have been allocated to the export industry because of the undervalued yuan, making it difficult to boost domestic consumption.''

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net.