Yuan Forecast Cut at RBS as China Exports, Inflation May Cool

By Kim Kyoungwha and Judy Chen

Aug. 14 (Bloomberg) -- Royal Bank of Scotland Group Plc. lowered its forecast for China's yuan, saying weakening overseas demand and slowing inflation are prompting the central bank to rein in yuan appreciation.

The Chinese currency will advance to 6.6 per dollar by the end of 2008, weaker than a previous forecast of 6.4, as the dollar climb against major currencies, strategist Ben Simpfendorfer in Hong Kong wrote in a report today. The yuan, which closed today at 6.86 in Shanghai, has retreated 0.1 percent versus the U.S. currency since June 30, after climbing 4.2 percent in the first quarter and 2.3 percent in the second.

``A stronger dollar is an important driver of the forecast change,'' Simpfendorfer said. ``However, the People's Bank of China is also partly responding to a weaker global economy and lower inflation.''

A government report today showed China's industrial production grew 14.7 percent from a year earlier in July, the slowest pace since February 2007. Consumer prices rose 6.3 percent, the smallest increase in 10 months, according to a separate report released this week.

The gross domestic product of the 15 nations sharing the euro dropped in the second quarter for the first time since the currency was introduced almost a decade ago and Japan's economy also contracted, according to figures published yesterday and today. The U.S. economy, China's biggest export market, shrank in the fourth quarter of 2007.

Medium-Term Appreciation

Simpfendorfer stressed it would be ``wrong to exaggerate'' the risks to China's economy of a global economic slowdown and said the country needs to press ahead with restructuring its export industries. The yuan will reach 6.2 per dollar by the end of 2009, he predicts.

``The arguments for medium-term appreciation are intact,'' Simpfendorfer said. ``A stronger currency helps the government replace an ageing export-led growth model with a consumer-driven version.''

The yuan will end this year at 6.64 against the dollar and strengthen to 6.25 by the end of 2009, according to the median estimate in a survey of 22 analysts by Bloomberg News. The currency declined in the past three weeks after government officials said on July 25 that supporting growth is as important as fighting inflation.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net. Judy Chen in Shanghai at xchen45@bloomberg.net;