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21 Jun 2010

International Economy

China’s More Flexible Yuan Driving Asian Currency Appreciation (Business Brief No.2851)

After holding Yuan (CNY) movements in a narrow bandwidth at around CNY6.83/USD over recent years, Chinese authorities surprised the financial market with their announcement on June 19, 2010, that they would enhance Yuan flexibility. Responding swiftly to official efforts, the Yuan showed swiftly appreciation to a post-revaluation high of CNY6.7958/USD. Meanwhile, stock markets, oil prices in the global market and other Asian currencies all quickly surged in response to this announcement.
Chinese efforts will help the Yuan to be more consistent with market mechanisms, although their central bank will allow the Yuan to rise or fall only 0.5 percent against the US Dollar each day from a mid-point (based on conventional rules).
Because this is a complex issue affecting many sectors, KASIKORN RESEARCH CENTER (KResearch) views that increased flexibility in the Yuan will help reduce pressure internationally, but may be a complex challenge to Chinese economic balance in the future. Chinese authorities may face many challenges in the quarters ahead, including problems in labor standards that may soon require adjustments to their minimum wages, thus affecting many industries. That could affect the operational flexibility and/or competitiveness of many industries after the Yuan becomes stronger.

Although the Chinese authorities have permitted the Yuan to move more flexibly, it is possible that further Yuan appreciation will be less than that seen in other Asian currencies' or increases in commodity prices. Therefore, the Chinese authorities should brace for some inflationary pressure and the risk of economic bubbles. Finally, the tightening monetary measures by the People's Bank of China will likely be seen more of later on, and thus interest rates may be used as a tool to maintain economic stability. Therefore, Chinese economic momentum should be closely monitored because it will indicate the continuity of Yuan appreciation path in the future.

International Economy