China's Yuan May Weaken Against Dollar, Standard Chartered Says

By Judy Chen

Oct. 24 (Bloomberg) -- The yuan may experience a ``modest'' decline against the dollar in the first half of 2009 while appreciating against a basket of currencies of China's trading partners, according to Standard Chartered Plc.

Gains against other currencies including the euro and the British pound may help deflect criticism that that an undervalued yuan gives Chinese exporters an unfair advantage, David Mann and Callum Henderson, the U.K. bank's currency strategists in Hong Kong and Singapore, wrote in a report on Oct. 22. The central bank has managed the yuan against a basket of currencies since it scrapped a dollar peg in 2005.

Appreciation against the basket will ``make it possible for the yuan to weaken slightly against the dollar while still being consistent with calls from the international community for trade- weighted'' gains, the analysts wrote.

The yuan may weaken 1.9 percent to 6.91 per dollar in June 2009, after reaching 6.78 at the end of this year, Mann and Henderson forecast. The currency was little changed at 6.8354 at 5:30 p.m. in Shanghai, according to China Foreign Exchange Trade System.

China's currency declined the past two months, after gaining every month since May 2006, which hasn't prompted any complaints from the country's trading partners. U.S. Treasury Secretary Henry Paulson said Oct. 22 he is ``pleased'' the yuan has risen more than 20 percent since July 2005.

Stalling Gains

China stalled the yuan's advance against the dollar since the mid-July, while allowing gains of 25 percent against the euro and 23 percent versus the British pound in the same time.

Asia's second-biggest economy is concerned a global recession will reduce demand for the goods it exports. The yuan rose 0.08 percent against the dollar last quarter, the smallest advance since the peg ended more than three years ago.

``The worries over a global recession and the expected narrowing in the trade surplus'' will lead to ``some modest depreciation in yuan's spot rate against the dollar in the first half of 2009,'' Mann and Henderson wrote.

The Westpac Nominal Effective Exchange Rate, a trade- weighted index for the yuan, has risen 2 percent this month after climbing 4.6 percent last quarter, the biggest quarterly gain since the end of the fixed exchange rate.

Central bank Governor Zhou Xiaochuan said on Oct. 6 that China will focus on maintaining stability in the exchange rate. The country's gross domestic product grew 9 percent in the third quarter, the slowest pace in five years, down from 10.1 percent in the second quarter.

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