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A report by a research institution under China's Ministry of Commerce says the moderate appreciation of the Renminbi will help the balanced development of foreign trade and the national economy in the long run.

The report on the development of foreign trade and economic cooperation against the challenge of RMB appreciation predicts the Chinese currency will gain nine to 10 percent against the US dollar this year.

Since the government reformed the foreign exchange rate system in July 2005 the RMB has appreciated 5 percent. The report says the continued, progressive and moderate appreciation of RMB would help "regulate" China's yawning trade surplus.

On Monday Commerce Minister Bo Xilai said, "Cutting the huge trade surplus is the priority task for 2007.Enterprises and trade authorities at various levels should be fully aware of the significance of surplus reduction."

The report was seen by analysts as an important signal that appreciation would be used to regulate China's foreign trade, which totaled US$1.76 trillion, a growth of US$338.78 billion or 23.8 percent, from 2005.

The trade surplus amounted to a record US$177.47 billion in 2006. This is an increase of US$75.59 billion from the previous year.

The report says the mounting surplus and capital accounts had weakened the central bank's regulation of liquidity. Inefficient and redundant construction projects had resulted in overproduction which forced manufacturers to turn to international buyers, observes the report.

It acknowledges the RMB has been undervalued. In the long term the Chinese currency will continue an upward trend. However, the report points out, the appreciation should be moderate, controllable and progressive and not subject to sharp fluctuations.

The report's authors believe changes in the foreign exchange rate largely affect foreign trade in the longer term.

Since the RMB began to gain 14 months ago no major fluctuations have occurred in China's external trade -- exports have remained stable while imports have grown slightly faster mainly driven by strong domestic demand.

Processing trade, which is less responsive to changes in the foreign exchange rate, makes up more than half of China's foreign trade. Technological progress and improved productivity will offset, more or less, rises in production costs resulting from appreciation.

In the longer term, however, the RMB's appreciation will restrain exports from growing too quickly and result in a growth in imports, according to the report.

It estimates that an appreciation of 10 percent would correspond to a slowdown in exports by three to four percent and import growth will accelerate by three to four percent.

And the report says the appreciation will have some negative effects on China's external trade. Firstly, the revaluation would dampen benefits in central and western China.

Foreign sales of resources, farm produce and low-added-value products would slow and even decline. This would slow economic growth in central and western regions which rely heavily on resources and agriculture, encroach on farmers' incomes and deprive laborers with low skills of jobs.

Secondly, exports of some large machinery and equipment would be challenged. Exports of some large items take five to 10 years from contract signing to final delivery. It's difficult for exporters to predict forward foreign exchange rates.

Thirdly, if the RMB appreciated too fast and by an unduly big margin, exports would slow drastically or even plunge, and affect the stable growth of the national economy. And imports of some commodities would likely soar dramatically which would threaten the domestic market and even cause deflation.

(Xinhua News Agency January 17, 2007)