The yuan extended its strong momentum of appreciation yesterday, breaking the 7.2 mark against the US dollar, another post-revaluation high.

 

The central parity rate of the yuan was 7.1996 against one dollar, the fourth straight post-revaluation record. Dealers said it was mainly because of the expected cut in the US interest rates and the domestic inflation pressure.

 

The US Federal Reserve is expected to cut interest rates again this week following last week's 75-basis-point emergency cut. It will be harder for China to raise its interest rates to curb inflation because opposite interest rate movements between the yuan and the dollar may usher in more speculative capital into the domestic market.

 

"The strong rise of yuan may reflect the intent of policymakers to use its appreciation to reduce inflationary pressure," said Wu Dan, a foreign exchange dealer at China Minsheng Banking Corp.

 

Ha Jiming, chief economist of China International Capital Corp, said: "Yuan revaluation would ease pressure on import-induced inflation."

 

International prices of grain, oil and other major commodities have surged in the past year, adding to the inflationary pressure.

 

The CPI rose 4.8 percent in 2007, compared with 1.5 percent in 2006. In November, it rose 6.9 percent, an 11-year high.

 

Inflation may hit new highs in January because of unfavorable weather conditions in central and eastern China, which has disrupted transport and affected supply of food and fuel while demand is picking up as the Lunar New Year holiday draws near, analysts said.

 

This, coupled with the recent price regulation, may lead to energy shortages and aggravate inflationary pressures in the short term, wrote Liang Hong, chief economist of Goldman Sachs (Asia) in Hong Kong. "These latest developments will likely push up near-term inflation to levels that will be very uncomfortable."

 

Some economists, however, warned that if the yuan rises too fast, it would substantially damage the economy.

 

"It is better for the yuan's appreciation to go at an annualized rate of about 5 percent," said Yang Fan, economist with the Business School of China University of Political Science and Law. "It would give Chinese enterprises some time to make adjustments."

 

Studies show that if the yuan crosses 6 against the dollar, it will "bring danger" to the Chinese economy, he warned.

 

(China Daily January 29, 2008)