China's yuan rose against the dollar on Wednesday, posting a full-year gain of 7.05 percent in 2008. But traders said the weakness of the Chinese economy and the instability of global markets meant the yuan was unlikely to perform nearly as well next year.
"China's economy is expected to continue deteriorating at least through the first quarter, with slowing exports, rising unemployment and consequent social instability forcing the government to allow the yuan to depreciate slightly," said Liu Dongliang, currency analyst at China Merchants Bank in Shenzhen. "There are no clear signs that the global financial crisis has ended, meaning the dollar may resume rising globally and exert further downward pressure on the yuan."
Most of the yuan's appreciation in 2008 - 6.56 percent - occurred during the first half of the year, as Chinese authorities encouraged yuan strength to fight rising inflation. In the second half, global strength of the dollar and slowing economic growth in China prompted Beijing to halt appreciation of its tightly controlled currency.
So far, Beijing has prevented any significant depreciation of the yuan against the dollar, partly because it wants to avoid large outflows of capital and competitive depreciations of other Asian currencies.
But as 2008 ended, Beijing was facing increasing domestic pressure to allow the yuan to depreciate, as exporters and other critics of China's currency policy complained that sharp appreciation in the first half had hurt export competitiveness and caused unemployment.
Liu, as well as many other analysts and traders, therefore see a chance for the yuan to weaken modestly against the dollar in the first half of next year, perhaps by 2 percent or at most 3 percent. Most of them, however, believe the yuan is likely to rebound moderately along with China's economic growth in the second half of next year, to end 2009 little changed from a year earlier.
On Wednesday, the Chinese central bank set the yuan's daily mid-point against the dollar marginally stronger at 6.8346 against Tuesday's 6.8353. The central bank has set the reference rate slightly higher on each of the past five days, and that gave the yuan a shot in the arm in Wednesday's trade, which was thin with some dealers off for year-end holidays.
"Some banks are betting on a slight yuan rise right after the market resumes trading next Monday," said a dealer at a major European bank in Shanghai. "That helped push the yuan up today." Spot yuan finished at 6.8230 on Wednesday, up from Tuesday's close of 6.8353.
Offshore, one-year dollar/yuan non-deliverable forwards fell to 6.9860 bid in late trade from Tuesday's close of 6.9900. Their latest level implied yuan depreciation over the next 12 months from the day's spot mid-point of 2.17 percent, compared with 2.21 percent implied at Tuesday's close.
Wide swings in one-year NDFs during 2008 illustrated drastically changing expectations for the yuan's long-term performance. NDFs implied 12-month yuan appreciation of as much as 13.79 percent in March, and depreciation of as much as 7.18 percent in early December.
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