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Voices in favour of RMB depreciation get louder
08
Jan '09
An entirely free floating exchange rate of the RMB will still have to wait for some more time, but the unexpected international financial crisis has disrupted the pace of RMB exchange rate reform. Poor demand in international market has created steep pressure on exports of Chinese enterprises since July 2008 and voices in favour of a free floating RMB have got louder.

A survey made by Reuters in December 2007 had expected that one US dollar would fetch 6.84 Yuan in exchange by the end of March this year, 6.83 Yuan by the end of June, and 6.80 Yuan would be exchanged into one U.S. dollar by the end of December.

From the second half of 2008 onwards, orders from overseas markets have substantially reduced due to the drag of the financial crisis and business failures in the Yangtze and the Pearl River Delta are growing. In addition, since the beginning of the exchange rate reform in July 2005, the RMB has revaluated by nearly 20 percent.

This has significantly eroded profits of enterprises and the ones who were operating on very low margins have got in to serious trouble with all of them expected to face more disasters if the RMB appreciation was to continue in the current year. However, most domestic foreign exchange analysts believe that the RMB is more likely to decline throughout the year.

A report from Haitong Securities Research Institute points out, in accordance with the purchasing power parity (PPP) which is calculated by ratio of commodity prices in different countries, one dollar should fetch 7.55-8.00 Yuan, but in accordance with the interest rate parity, RMB depreciation rate against the U.S. dollar could reach 49.7 percent in the future.

The RMB is expected to maintain a relatively stable trend amid consolidation during most of the time in the current year, though the Yuan might moderately decline to alleviate export pressure, if economic situation continues to deteriorate and might devaluate by less than 3 percent.

Fibre2fashion News Desk - China


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