Special report: Yuan's exchange rate in spotlight

    BEIJING, Jan. 1 (Xinhua) -- The exchange rate of Renminbi, the Chinese currency, is expected to appreciate by some five percent to one U.S. dollar for 7.44 yuan, according to Xinhua Economic Analysis Report released Monday.

    The report projected that the pace of RMB appreciation would be faster in the first half of 2007 than in the second half.

    Xinhua Economic Analysis Reports are regular products by a team of more than 80 economic analysts under Xinhua Economic Information Department. The latest issue of the reports reviewed the country's ten key indices in the economic and financial sectors and made projections on possible changes in the coming year.

    In 2006, the value of the RMB rose 3.28 percent against the dollar, with an accelerating trend from 0.66 percent in the first quarter to 1.15 percent in the fourth. The central parity price closed at one U.S. dollar for 7.8141 yuan, the lowest of the year.

    The report held that the short-term RMB exchange rate will be influenced by the fluctuation between the dollar and other currencies, but in the long run, it depends on the progress of China's exchange rate reforms. Stable appreciation in small steps is generally expected.

    Earlier in December, China's State Information Center predicted a three-four percent appreciation of the yuan in 2007, while the Bank of America and Deutsche Bank expected a rise of four-six percent and 4.5 percent, respectively.

    China's foreign exchange policy is in line with the pace of China's economic development and the daily floating band is enough to allow sufficient appreciation of the RMB, according to Chinese economist Fan Gang.

    However, some economists argue that the appreciation of the RMB is a double-edged sword, as it will make Chinese exports more expensive and therefore reduce export volume. Some export-driven small and medium companies may not be able to survive and have to lay off employees.

    "If China were coerced into really large appreciations of the RMB, it could face the same deflationary fate as Japan in the 1980s and 1990s -- and all this without reducing its trade surplus," said Ronald McKinnon in an article published Wednesday by The Wall Street Journal.

    Zhou Xiaochuan, governor of the People's Bank of China, said that there was no timetable for a further widening of the daily floating band between the RMB and the U.S. dollar.

    China raised the value of yuan by two percent to 8.11 per U.S. dollar and started linking it to a basket of currencies on July 21 of 2005, and allowed it to move 0.3 percent above or below the parity rate against the U.S. dollar.

    The report also projected that the country's gross domestic product (GDP) will grow by 9.5 percent, lower than the estimated 10.5 percent for 2006. Major reasons for the slowed pace include the decline of global economic growth and the Chinese government's tighter macro-economic control aimed to curb overheated sectors such as investment and housing.

    It forecasts that fixed asset investment will increase by 25 percent, compared with the estimated 26.6 percent growth for 2006. However, the report cautioned that investment can easily rebound for reasons of liquidity surplus, fast growing corporate profits and local governments' investment impulse.

    The growth of fixed asset investment and credit both slowed down in 2006 as a result of hikes in the benchmark lending interest rate, which was increased from 5.85 to 6.12 percent.

    It will be less necessary for the central bank to further raise interest rates in 2007, as too fast declines of investment growth will be no good to an anticipated slack in economic growth, but the possibilities of interest rate drops are even smaller, says the report.

    The Chinese government has been trying to curb runaway investment to let consumption contribute more to economic growth, with measures to stimulate domestic demand such as improving the social security system, raising minimum wages and protecting the interests of migrant laborers.

    Domestic consumption will grow faster in 2007, with retail sales of consumer goods to rise 15 percent year on year, the report predicts. The number is estimated to be 13.7 percent for 2006, 0.9 percentage points up from 2005.