Yuan gains 34% against USD, what next?
The ratio of China's current account surplus to its GDP has dropped from more than 10 percent in 2007 to 2.6 percent in 2012, the lowest level since 2005, and below the internationally recognized alarm level of 4 percent.
A rising yuan has reshaped the export businesses in China, the world's largest exporter. As the currency appreciated at an annual pace of 4 percent, some export companies with a low profit margin of less than 10 percent were forced out of business.
Zhang Bin, an economic researcher with the Chinese Academy of Social Sciences, said while the yuan appreciated against other currencies in the past eight years, it depreciated in the domestic market, as evidenced by the rising property and consumer prices.
The continuous yuan appreciation has triggered inflows of cross-border capital for arbitrage activities. With more capital inflows, the central bank has to boost the yuan funds in the foreign exchange market to purchase foreign currency.
Figures showed that China's M2, a broad measure of money supply that covers cash in circulation and all deposits, has more than tripled since 2005 to 100 trillion yuan in April this year. The abundant liquidity is blamed for fueling asset bubbles.
Liu Ligang, chief greater China economist at ANZ Banking Group, said that expectation for the yuan's further appreciation is weakening.
China's total yuan funds outstanding for foreign exchange declined in June, marking the first net outflow of capital since December last year, as a result of the tumble in China's export, the US Federal Reserve's plan to taper off QE3 and the weakening expectation of a rising yuan.
Liu said it is highly likely that the yuan will depreciate in the coming months.
