By Yoon Ja-young
Staff Reporter
Amid growing pressure to have its currency revalued, China is looking positively about allowing the yuan to rise against the dollar, a move that is expected to provide benefits for the Korean economy.
In its third quarter monetary policy report, the People's Bank of China erased the usual phrase of keeping the yuan "basically stable at a reasonable and balanced level," replacing it with "considering major currencies in guiding exchange rates," which analysts took as signs that it would let the yuan rise.
Beijing faces mounting pressure to allow appreciation. On top of pressure from the United States, which has been suffering gigantic trade deficits with China each year, IMF chief Dominique Strauss-Kahn also said a stronger yuan is needed for China's economy.
"Allowing the renminbi and other Asian currencies to rise would help increase the purchasing power of households, raise the labor share of income, and provide the right incentives to reorient investment," Strauss-Kahn said, Monday.
"The Chinese government knows that export-led growth will face limits, and it should upgrade the economy by expanding the domestic market. The yuan's appreciation is needed," said Jeong Yong-taek, an economist at KTB Securities.
Analysts in Seoul agree that a stronger yuan will do more good than harm to the Korean economy. "An appreciation of the yuan will be a plus for the Korean economy. If the yuan, which has de facto been fixed to the U.S. dollar after the global financial crisis, goes up in value, Korean companies will have better price competitiveness with Chinese firms," IBK Investment & Securities said in a report.
The decline of the U.S. dollar has been annoying news for Asian exporters struggling to maintain price competitiveness. China, meanwhile, has been in better position as exporters enjoyed government supported stability of its currency.
The Korean won closed at 1,154.80 won per greenback, Monday, the strongest level this year, and is expected to gain more ground. Daishin Securities expected the won-dollar rate to reach 1,108 won next year.
This means Korean exporters will be losing price competitiveness. The Ministry of Strategy and Finance estimated Korea's export to total $393.5 billion next year, lower than $422 billion of 2008. The trade surplus is estimated at a mere $9.8 billion in 2010, one fourth of the estimated figure for this year.
A stronger yuan can make up for the loss of price competitiveness of Korean exporters which compete with Chinese players.
A strengthened Chinese currency also means more demand for Korean goods on Chinese markets. "If the yuan's buying power goes up, the Korean economy, which is heavily dependent on exports to China, will directly benefit," IBK Securities said.
Korean exporters have been losing competitiveness against their Chinese rivals as the won has strengthened against the yuan. The Korean won traded at 230 won per yuan in March, but has been gaining steeply since then, as it has with the dollar. The won closed at 169 won per yuan, Monday, gaining 26 percent since March.
China has pegged the yuan at 6.83 per dollar since July last year to help exporters.
China has been Korea's biggest export market since 2003, valued at $91.4 billion last year.
"The effect on the Korean economy won't be immediate, but the rise of the yuan is the most noteworthy factor for the mid to long term," KTB's Jeong said.
chizpizza@koreatimes.co.kr
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