Yuan rises to 17-year high to tame CPI

08:28, February 22, 2011      

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The yuan rose to a 17-year high yesterday on expectations that the currency would continue to climb to help tame inflation.

The currency climbed to an intraday high of 6.5654 yesterday before it closed at 6.5668 against the US dollar, according to the China Foreign Exchange Trade System in Shanghai.

The People's Bank of China, the central bank, set the central parity rate of the yuan at 6.5705 against the greenback yesterday, up 0.12 percent. It was the strongest level since China unified the official and market exchange rates at the end of 1993. The yuan is allowed to trade up to 0.5 percent on either side of the central parity rate.

The yuan has risen nearly 26 percent since China dropped its peg to the US dollar in July 2005.

Economists are widely expecting an appreciating yuan among a package of measures, which include more hikes in interest rates and reserve requirement, to tame inflation and ward off asset price bubbles.

Nicholas Kwan, Asia chief economist of Standard Chartered Bank, said he expects the yuan to appreciate 5 percent to 6 percent this year, with the currency at 6.2 against the greenback at the end of 2011.

"The biggest benefit of a more valuable yuan for China is to trim its costs in buying assets overseas," Kwan said. "What China lacks is not foreign exchange reserves but resources and high technology that it needs to maintain its growth."

PBOC Governor Zhou Xiaochuan was cited as saying in Paris on Friday that exporters can still manage a further appreciation of the yuan.

The consumer price index, the main gauge of inflation, rose 4.9 percent in January on a new basket which now gives a lower weight to food costs. The rise was still faster than 4.6 percent in December.

"Inflation remains challenging and more tightening is expected," said Citibank in a research note.

Xia Bin, adviser to the PBOC, said last week further interest rate increases are needed.

Source: Shanghai Daily
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