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Anil K Joseph
Beijing, Nov 25: China's currency will face mounting pressure for appreciation rather than depreciation over the next two years, an economist with the Hong Kong and Shanghai Banking Corp (HSBC) has predicted.
"Continuously falling prices, a growing trade surplus and the need for the central bank to offload part of its foreign currency reserves will push the renminbi yuan to rise between 10 and 15 per cent," said Joe Zhang, head of China research of the HSBC Securities Asia.
The official ``China Daily'' on Wednesday quoted Zhang as saying that he believes China's price deflation will continue in the next several years, largely due to China's hefty grain reserves and improved agricultural and industrial productivity.
Food prices serve as the driving force for China's price fluctuations and account for about half of the country's retail price index.
He pointed out that China's market supply of grain will remain sufficient in the next several years, leading to a further fall in prices of foodgrains andsuppressing the prices of other products.
"Cheaper prices means a stronger buying capacity for the renminbi and this will create space for its appreciation domestically," Zhang said here on Tuesday.
Zhang said that deflation is caused by productivity growth rather than a mere monetary contraction and will not bring much trouble to China in sustaining its high economic growth, the country having set a growth target of 8 per cent for the whole year.
Another reason cited for the renminbi's appreciation was China's swelling trade surplus which touched $38.4 billion during the first 10 months of 1998, up 7.8 per cent over the same period in 1997.
He said the prospects for China's exports will remain dim although imports are likely to register a lower growth rate.
During the first 10 months of this year, China's exports grew by 1.3 per cent to $148.8 billion, whereas imports dropped by 0.7 per cent to end the period at $110.3 billion.
Zhang commented that China's financial authorities have accumulated``too much'' in the way of foreign exchange reserves (at over $143 billion), which results in the central bank having insufficient resources to conduct open market operations, namely buying and selling treasury bonds and debentures to adjust the country's money supply.
To avoid too rapid an appreciation of the renminbi, the People's Bank of China has been purchasing hard currency from the market.
However, Zhang pointed out that China's central bank needs to offload some of its foreign currency reserves to get money and expand money supply by buying bonds.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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