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The yuan is strengthening against the U.S. dollar at a rapid pace, ringing in an epoch when renminbi will be increasingly popular around the world. As of April 3, the yuan was valued at 7.0192 per dollar, up 18 percent from July 2005 when the Chinese government implemented exchange rate reform.
Since early this year, the yuan has risen more than 4 percent in value against the greenback. Before long it is expected to reach a record 6 to the dollar. Global investment banks predict the yuan will rise about 10 to 15 percent against the U.S. currency this year. Some speculate it will adjust to some 5 yuan per dollar next year.
Pundits expect the strong yuan era to provide a soft landing for the Chinese economy and allow it to move gently from explosive to stable growth. But they worry the strong yuan will deal a considerable blow to South Korean enterprises in China and South Korea's exports there.
Global investment banks predict the yuan-dollar exchange rate will drop to 6.3 to 6.7 at the end of this year. In a report released on March 26, Standard Chartered Bank predicts the yuan-dollar exchange rate will then fall to 5.9 next year.
It is due to the internal situation, many experts believe, that China finally decided to change its attitude, having over the past few years ignored calls from the West led by the U.S. to revaluate the yuan. Excess liquidity caused by a huge trade surplus posed a serious problem, and this put greater pressure on prices to rise.
The revaluation will solve excess liquidity by reducing the trade surplus and deflate price pressure by lowering import prices. Beijing decided to allow the yuan to rise against the greenback based on its strong confidence in the country's economic competitiveness, expecting no significant threat to growth. While depending less and less on the U.S. market, China has come to rely more and more on Europe and Asia for exports.
It apparently believes it can recoup any losses from the resulting slow rise of exports to America with booming exports to other regions. The American market accounted for about 17 percent in China's exports in 2007, while the European market's share increased to 24 percent.
But China is South Korea's largest export market, accounting for 22.1 percent (US$81.9 billion) of the export volume of W371.4 billion in 2007. That percentage is far higher than Korean exports to Europe (15.1 percent) and the U.S. (12.3 percent). So far, there are no signs that Chinese exports are dwindling and imports from Korea with them. But some 40,000 Korean enterprises operating in China are seeing their profitability dwindle.
And 54 percent of Korean exports to China are components supplied by headquarters to their subsidiaries in China. Thus if the Chinese domestic market dwindles as a result of the strong yuan, Korean companies there will be the first to feel the crunch, which will eventually rebound on headquarters in Korea.
In short, the Chinese economy may be ready for a strong yuan, but the Korean economy is bound to suffer.
Lee Seung-shin, a research fellow at the Korea Institute for International Economic Policy, said, "If Korean companies in China are to minimize the damage from the yuan's revaluation, they¡¯ll have to target the domestic Chinese market, which is less affected by exchange rate fluctuations, and increase exports of high-value added products."
(englishnews@chosun.com )
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