Yuan hits 5-year high after reforms

09:50, June 29, 2010      

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The yuan jumped to a record high against the dollar Monday, a week after the People's Bank of China (PBC) announced further reforms of the exchange rate regime.

The PBC set the yuan's central parity rate at 6.7890 against the dollar Monday, the highest level since July 2005 when China depegged the yuan from the dollar.

Such reforms were suspended during the economic crisis, but the announcement on June 19 resumed a depegging.

Over the past week, the yuan fluctuated around 6.80 against the dollar, ending the 6.83 yuan peg to the dollar.

The exchange rate will lose flexibility if only pegged to one currency, Yi Gang, vice governor of the PBC, said at a forum in Shanghai over the weekend.

Economists said the yuan will keep rising, albeit gradually.

The yuan is returning to its pre-crisis path, and it has already appreciated a lot against the dollar, said Frances Cheung, a senior strategist for Asia excluding Japan at Crédit Agricole CIB in Hong Kong.

Cheung predicted a 3 to 5 percent appreciation in a year from now.

"That's very gradual but it is more realistic."

Some analysts fear a rising yuan's effects on China's export economy.

The revaluation is likely to affect the country's trade, which is just rebounding, said Tan Yaling, head of the China Forex Investment Research Institute.

But Cheung said the concerns over exports could be relaxed as other Asian currencies are expected to rise as well.

The fact that China's trade kept expanding along the same path since 2005 also proves that the currency reforms have had little impact on trade, she added.

"Intra-Asia production linkages would mitigate the impact on China's export prices," Johanna Chua, Citigroup's chief economist for Asia Pacific region, also said in a note Monday.

The PBC's move reflects China's intention to make the yuan an international currency, Cheung said.

But the yuan's real appreciation may be increasingly important over the medium term, "as real appreciation can be realized via a combination of nominal appreciation and higher inflation," Chua pointed out.

The country's rapid wage growth is likely to raise the inflation level to above 4 percent in the coming decade compared to 2 percent in the previous 10 years, Chua said.

Prices will further move up as price reforms covering everything from water to electricity are implemented, she remarked.

Source: Global Times


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