Bloomberg News

Yuan Unlikely to See 5%-6% Annual Gains, China Researcher Says

March 15, 2012

China’s currency is unlikely to rise 5 percent or more a year against the dollar as the economy’s long-term growth rate declines, according to a researcher at a government-backed institute.

Apart from a February trade deficit that may ease pressure for the yuan to rise, the long-term return investors can reap from China’s economic expansion is falling, reducing potential gains in the currency, Liu Yuhui, director of the financial experimental-research office at the Chinese Academy of Social Sciences in Beijing, said in a telephone interview today.

Premier Wen Jiabao said yesterday that the yuan may be near an equilibrium value and that policy makers will allow greater two-way movement in the exchange rate. Wen earlier this month set China’s economic-growth target at 7.5 percent for 2012, below an 8 percent goal in place since 2005, as the nation shifts the focus of its expansion away from exports to domestic consumption.

“The possibility for the yuan to gain 5 to 6 percent a year has dropped significantly,” Liu said. The currency probably won’t maintain a fast pace of appreciation until a new economic model is “well established and generates stable returns,” he said. How long that takes “depends on how the reforms are carried out,” Liu said.

China’s economy grew 9.2 percent in 2011 after a 10.4 percent expansion in 2010. The yuan appreciated 4.7 percent against the dollar in 2011 and has dropped about 0.6 percent since the beginning of this year. It was little changed at 6.3328 per dollar at 1 p.m. in Shanghai.

Releasing Funds

At the same time, “it may also be difficult for investors such as hedge funds to bet on yuan depreciation in the near term,” Liu said. The People’s Bank of China can release funds from its $3 trillion of foreign-exchange reserves to meet any rise in demand for U.S. dollars and stabilize the yuan, he said.

The odds the Chinese government will keep offering “significant subsidies to boost the economy” are shrinking and its capability to do so is “increasingly limited,” Liu said.

The government is targeting average economic growth of 7 percent a year during the so-called 12th five-year plan period, which covers 2011 through 2015. The goal has been routinely exceeded and growth reached 14 percent as recently as 2007, when the target was 8 percent, according to statistics bureau data.

The world’s second-largest economy had the biggest trade deficit in at least 22 years last month, the weakest January- February factory-production gain since 2009 and retail sales below the median economist estimate, government data showed March 9 and 10.

To contact Bloomberg News staff for this story: Victoria Ruan in Beijing at vruan1@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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