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Central Bank intervention expected to stabilize RMB
Dec '08
After months of witnessing stabilization, the RMB has consecutively fallen in recent days and touched the upper limit of the fluctuation range several times against the US dollar. It is believed that China's monetary authority will intervene and guide the movement of the exchange rate by using market forces. The authority will initially implement phased depreciation of RMB exchange rate and have the depreciation rate under control, according to sources.

At present, the Central Bank will have to consider economic growth and the reality of un- employment and act accordingly. Devaluation of the Renminbi, increasing export tax rebate rates and easing money supply are all the policies and measures to aid exporters. In comparison, the cost of depreciation is smallest; its efficiency is highest and does not easily result in other trading partners taking means of retaliation.

From technical point of view, devaluation of the Renminbi is a reaction to appreciation of U.S. dollar in recent times. At present, China manages the rates by means of a floating exchange rate system by pegging RMB to a basket of currencies. The U.S. currency commands the highest weight in the basket of currencies and the devaluation trends have begun, more so since the financial crisis unfolded.

Economic fundamentals also support recent devaluation of the RMB against the U.S. dollar. As a long-term depreciation of the dollar does not conflict against its recent appreciation in the same way they say, a long-term appreciation of the Renminbi also does not conflict against its recent depreciation.

In the long run, China's economy will continue to sustain rapid and sound growth, China will maintain trade surplus and net inflow of capital, the base on which the Renminbi has had a long-term appreciation. But in recent times, China's export competitiveness has been lowered, domestic economy is in downturn and export surplus shows a significant contraction. All these factors put together do not support continued appreciation of the RMB exchange rate.

The Chinese Central Bank is expected to conduct a gradual and phased devaluation. It is expected that the depreciation of RMB exchange rate will at least be 5 percent next year, together with other measures which can help avoid a negative growth rate in exports from the country.

Fibre2fashion News Desk - China

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