Yuan hits highest level against dollar in five years | Asia| An in-depth look at news from across the continent | DW | 21.06.2010
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Yuan hits highest level against dollar in five years

At the weekend, the People's Bank of China said it would strengthen the flexibility of the exchange rate, giving rise to hopes that the yuan might no longer be pegged to the US dollar.

A bank clerk counts yuan notes

A bank clerk counts yuan notes

Just a week before the G20 summit kicks off in Canada, there has been euphoria in the US that Beijing seems to be softening its stance regarding its currency policy.

However, Qin Gang, a government spokesman, has made it clear that Beijing will retain its right to decide.

"We think it would be inappropriate to speak about the yuan exchange rate at the G20. We will continue to reform our currency policy but we will take our own independent and controllable steps. We do not want this subject to be politicised. We will resist anyone who wants to exercise pressure on us over the matter," he said.

The upcoming G20 summit is taking place in Toronto. China does not want the exchange rate to be on the agenda there.

The upcoming G20 summit is taking place in Toronto

US politicians say Chinese goods are too cheap

From the Chinese point of view, the West – especially the US – has been exercising pressure on Beijing. US politicians blame Chinese goods for the high trade deficit and lost jobs in the US. They say goods are unfairly cheap because the Chinese state has kept the yuan artificially low.

There has been an ongoing debate about whether this is the case and different methods of measuring the exchange rate come up with conflicting results.

The Shanghai-based economics journalist, Ye Tan, is convinced of the fact that the yuan should no longer be pegged to the dollar. This would mark an end to emergency measures taken during the financial crisis and a return to normality.

Between 2005 and 2008, the value of the yuan increased by 21 percent against the US dollar with a currency basket with the euro and the Japanese yen being used for orientation. This year, the value of the yuan has increased by 15 percent against the euro.

Goal is stable exchange rate

Ye Tan thinks this is problematic "in a country that is so fixated on production. Most of the company heads I speak to want only one thing – a stable exchange rate. Otherwise they would have to behave like speculators. If the yuan rises, many firms won’t have much breathing space. They are trying to get away from exports and to produce for the home market."

This fits in with the government’s economic strategy but Ben Simpfendorfer, a China expert at the Royal Bank of Scotland, says this is not an easy task.

"China is at a very tricky period," he explains. "It is trying to rebalance from external to domestic demand but that rebalancing has only just begun and the economy is still overly reliant on exports and fixed investment. The government would clearly like to change that but it will take a good decade.

The People's Bank of China HQ - the central bank wants to retain firm control of the yuan

The People's Bank of China HQ - the central bank wants to retain firm control of the yuan

"The worry is that during the transition period, the economy is reliant on just fixed investments. That makes it critical that when the government decides to reduce spending on roads, rail or apartment buildings growth rates could slow rapidly because private consumption is not strong enough to fill the gap."

As stability is the main concern of the Chinese leadership, which wants to control this transition process, observers do not expect the value of the yuan to increase significantly in the short run.

Author: Astrid Freyeisen / act
Editor: Disha Uppal

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