Yuan sets new high for third day

08:33, June 22, 2011      

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The renminbi (RMB), China's official currency, set a new high for the third day to a ratio of 6.4690 yuan per U.S. dollar on Tuesday.

It indicated a 5.25-percent growth from a year earlier when China launched its further exchange reforms on June 19, 2010. The ratio on the trading day before June 19 last year was 6.8275 yuan per U.S. dollar.

The yuan was buoyed on hopes that a solution to Greece's debt problems would be near, though talks between eurozone finance ministers did not lead to an agreement on Monday.

Meanwhile, the U.S. Federal Reserve's second-round quantitative easing, known as QE2, is set to expire at the end of this month, which made traders worry about the economic recovery momentum.

Lu Zhengwei, chief economist with the Industrial Bank, said the yuan's undervaluation against U.S. dollars has been patched up in the past year of exchange reforms.

If the U.S. dollar strengthens, the yuan will weaken in the future and investors should correct their mentality that "the yuan will never depreciate against the dollar," Lu warned.

Liu Yuhui, a researcher with the Financial Research Center of the Chinese Academy of Social Sciences (CASS), said the U.S. dollar depreciated almost 10 percent in the past year, but the yuan strengthened only 5 percent against it, and actually weakened against other strong currencies in the past year.

The yuan's real effective exchange rate (REER) stood at 118.26 in May, up 2.75 percent in the first five months this year, but down 0.35 percent from 119.03 in June last year, according to the Bank for International Settlements (BIS).

The REER index of the yuan is used to measure the yuan's external competitiveness vis-a-vis the currencies of the country's major trading partners and competitor exporter countries.

A hike in the REER index would mean the currency is appreciating on a real, trade-weighted basis, suggesting a loss in external price competitiveness.

Tan Yaling, an analyst with China Forex Investment Research Institute, warned of the yuan's depreciation.

Yuan exchange rate reforms have been moving in a single direction in the past seven years, appreciation, as is against market rules, Tan said.

Tan forecasts limited space for the yuan in appreciation and more believes attention should be paid to its depreciation, urging policy makers to pre-empt short selling from hedge funds.

Enterprises are the biggest sufferers of exchange rates changes and they are already under great pressure, Tan said.

Also, short-term pressure persists for the yuan to appreciate. China is expected to see a relatively large surplus in international payment balances, said the State Administration of Foreign Exchange (SAFE) in its 2010 annual report.

China abandoned a decade-old peg to the U.S. dollar by allowing its currency to fluctuate against a basket of currencies on July 21, 2005.

The reforms were suspended in a bid to fight the global downturn in 2008. The yuan exchange rate again was pegged to the dollar at a ratio around 6.83 from September 2008.

The peg was lifted on June 19, 2010, when the central bank announced further yuan exchange rate formation mechanisms.

In China's foreign exchange spot market, the yuan is allowed to rise or fall by 0.5 percent from the central parity rate each trading day.

The central parity rate of the yuan against the U.S. dollar is based on a weighted average of prices before the opening of the market each business day.

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