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FOCUS: Chinese yuan may be world's major currency in 20 years.

HONG KONG, July 19 Kyodo

China's currency is unlikely to become freely convertible in the world's foreign exchange markets within the next five years, but it could replace the Hong Kong dollar in 10 years and become the world's major currency in 20 years, Hong Kong-based chief economist for Morgan Stanley in Asia Andy Xie predicts.

A year after Beijing abandoned its 10-year-old peg of 8.28 yuan to the U.S. dollar on July 21 last year, the yuan has appreciated about 3.3 percent under pressure from the U.S. government and China's need to weather trade imbalances, boost internal consumption and set up a currency exchange mechanism.

Since the de-linking, the yuan has been pegged to a basket of foreign currencies that traded at 8.003 yuan to the dollar Wednesday.

''A fully market-driven pace of appreciation for the yuan is impossible with the current systems of risk management,'' Xie said. ''There is room for another 3 percent of appreciation after July 21 this year, but the exchange rate is still not fully flexible.''

He said reforms in China's financial infrastructure and risk management system need to be completed before the exchange rate can become fully market-driven.

''The yuan will not be freely convertible in at least five years. But a duo-pricing system will appear in Hong Kong. When more business transactions, or even salaries, are calculated in yuan for more a stable exchange rate, the Hong Kong dollar will gradually disappear, which could happen in a decade,'' Xie predicted.

China's trade volume will surpass the United States in five years and become the world's biggest trading country, Xie added.

''But it will take longer, may be around 20 years, for the yuan to become the world's major currency that is fully floating in the exchange rate system,'' he said, adding the New Taiwan dollar and South Korean won are also likely to be pegged with the yuan in future because of those countries' significant trade with China.

The yuan's appreciation is bad for China's exports, Xie said, but with a big trade surplus, the impact on exports due to appreciation will be minimal.

''The yuan's appreciation would not have as much impact on regional countries as it used to. Countries like Japan have moved their companies to the mainland and that would minimize competition. In fact, Asian countries have entered an economic complementary stage with China, when yuan appreciates, the pressure of competition is theoretically lessened,'' he said.

''However, yuan appreciation would raise inflation pressure for the U.S., which would cause the U.S. to raise its rates and affect its readjusting property market. Therefore, the U.S. government could apply less pressure on China to appreciate the yuan,'' Xie added.

Credit Suisse Regional Chief Economist for Asia Tao Dong said the United States has its own problems to handle and is too busy to focus on China at the moment.

''Beijing is reluctant to allow the (yuan) to appreciate substantially,'' Tao said. ''Its baby-step appreciation policy worked well and discouraged speculators who failed to make profits on the currency.''

Tao agreed that significant appreciation of the yuan would not help relieve unemployment in the United States, but it might even fuel inflation there.

He said the yuan has appreciated about 0.04 percent every week since February and he expects the exchange rate would be lower than 7.8 yuan to the dollar by the end of year.

Tao said the yuan's appreciation would have minimal impact on the Hong Kong dollar or even the city's economy, while the closer economic ties between Hong Kong and China would mean that the Hong Kong dollar pegged to the yuan, or the yuan replacing the dollar as currency of Hong Kong is ''not unimaginable.''

''But it is unlikely in the short term, as the yuan is neither freely exchanged nor highly credited. For the yuan to become fully market-driven in the long run, gradual development of private, financial and overseas institutions is necessary,'' Tao said.

Regarding the basket of currencies to which yuan is now pegged, Tao said he could not specify the proportion, but Xie estimated the dollar constitutes 60 to 80 percent of the basket, followed by the yen and euro.
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Publication:Asian Economic News
Geographic Code:9CHIN
Date:Jul 31, 2006
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