Addiction for stronger RMB spells trouble

While the Chinese currency Renminbi, or the yuan, continues its upward trend against the U.S. dollar, economic pundits have warned that to expect and demand more RMB appreciation in 2014 invites trouble.

China's yuan gained a solid 3.09 percent against the dollar in 2013, official data showed on Wednesday. The yuan ended last year 6.0969 against the greenback and has climbed higher in the first two weeks of 2014, with a record high of 6.0930 posted on Tuesday.

Breaking the 6.0000 key level will happen sooner or later, traders and analysts forecast.

The key levels of 8.0000 and 7.0000 were broken in 2006 and 2008 respectively.

Though the yuan's appreciation is worrisome, a habitual thinking that it will march onto higher territories breeds more trouble, said Tan Yaling, president of the China Forex Investment Research Institute, noting an increased preference among investors for profiteering through holding RMB rather than putting it in the market to support the real economy.

STRONGER RMB RISKY

Though China has made noticeable headway to allow its currency to float freely resulting in a costlier yuan, analysts said a stronger RMB is not a cure for the world's economic malaise and poses challenges for the country's reform efforts.

The yuan's appreciation in the international market has been coupled with a de facto depreciation in the domestic market. The Chinese now have perennial complaints about how little one yuan can buy.

In China's foreign exchange spot market, the yuan is allowed to rise or fall by 1 percent from the central parity rate each trading day. The possibility that China's central bank will tolerate more fluctuations in the future to aid the internationalization of the yuan causes concern, Tan said.

While the value of the RMB may yet to reach its real equilibrium, it is very close to it, making a stronger RMB not compatible with the status quo of the Chinese economy, said Ding Zhijie, head of the school of banking and finance at the University of International Business and Economics.

There is no such thing as undervaluation of the yuan as the exchange rate is largely determined by Chinese economic fundamentals, Ding added.

While China is the world's largest exporter, its economy shall not take this fact at face value, Tan said, citing a lack of technology featured in exports and weak service-based trade.

Though ranked first in the "three horse chariots of the Chinese economy" -- the other two being domestic need and investment -- the anemic exporting sector is in fact playing the third fiddle, Tan said.

The key level of 6.500 against the dollar is recognized, to a large extent, by the government and market as the "the survival line" of an exporter, she added.

As the reform-minded Chinese new leadership is taking the country on a course of long-term and painful transformation for more quality growth led by consumption instead of investment, allowing the yuan to rise at a quick pace and big margin is risky when China has yet to resume a sound footing, Tan said.

RMB APPRECIATION BREEDS PROFITEERING

While the world's major currencies, including the U.S. and Australian dollars, euro and yen are making a beeline to the lower territories, Tan said "it is perplexing to see the world put pressure on China for more rises in the yuan."

Tan declined to forecast whether the yuan will break the key 6.0000 level against the dollar, saying the Chinese authorities could do more to reverse the habitual thinking of the continued rise of the yuan.

According to Tan, if the rise of the yuan is safely predictable, people would make an easy profit out of holding RMB instead of letting it support the real economy.

In that way, the currency would lose its function as a tool to invest and boost the country's economy and will be reduced to merely a personal tool for profiteering, she said.