The Chinese yuan will keep strengthening at a brisk pace until the end of June, but its appreciation is set to slow markedly in the second half of 2008, a Reuters poll showed on Friday.
Economists surveyed also forecast that China's central bank would raise benchmark deposit and lending rates once before the end of the second quarter and then largely hold them steady through the start of 2009. The yuan and rate forecasts supported the view that China would use its currency more than interest rates to fight inflation, running at a 12-year high, but that the urgency to act would wane in the second half as prices pressures subside.
The poll of 24 analysts in China, Hong Kong, Singapore, Australia and the United States was conducted on April 10-11, after the yuan burst past 7.00 to the dollar on Thursday for the first time in more than a decade. The median forecast was for the yuan, also known as the renminbi, to hit 6.57 per dollar by the end of the year, a rise of 11.2 percent in 2008.
But the poll also showed that the annualised rate of appreciation is expected to slow from 14.8 percent in the first half to 7.0 percent in the second half, and to remain tepid in the first quarter of 2009. "The breakthrough of 7 may imply slower rather than fast renminbi appreciation in the rest of the year," Minggao Shen, an economist at Citibank in Beijing, said.
Along with gradually receding worries about inflation, the government would also feel less need to push the yuan higher if the dollar, to which the currency is still heavily tied, bottoms out, he said. "The weak US dollar is another reason to accelerate the appreciation process. But the need to do so could disappear, as the dollar should stabilise against major currencies," Shen said.
Evidence from the first quarter that China's politically contentious trade surplus may be cresting could also change the constellation of pressures facing Beijing on the yuan. The surplus for the first quarter shrank to $41.4 billion from $46.5 billion in the first three months of 2007, data showed on Friday.
From fending off American and European criticism that the currency is undervalued, China may instead fret more over the discontent of its exporters. "They are already complaining, with wage costs up, absorbing the move in the currency of the last 24 months and now demand weakness," Donald Straszheim, vice-chairman of Roth Capital in Los Angeles, said.
Seventy-four percent of those surveyed thought China would raise interest rates before the end of the second quarter, with medians showing the benchmark deposit rate up 27 basis points and the benchmark lending rate up 18 basis points. Economists forecast the central bank would then keep rates largely stable through the next three quarters.
The People's Bank of China has held rates steady since December, after six increases last year, partly out of concern that doing so as the United States cuts its rates could attract speculative inflows.
"Among all the tools in the central bank's hands, interest rate policy is the most forceful one and the central bank will be extra cautious in using such a measure," Bian Xubao, chief economist at Qilu Securities in Jinan, Shandong province, said.
Beijing was expected to continue raising the proportion of deposits that commercial banks must keep in reserve to absorb the vast amount of liquidity still being generated by inbound trade and investment flows. Already at a record high of 15.5 percent, the median forecast was for step increases to a 17.0 percent required reserve ratio by the year's end.
China's economic leaders said before this year that they would switch to a tight monetary policy to rein in inflation, but mounting concerns about a drop in growth because of the global downturn could easily change that, economists said.
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