Yuan at 17-year high to reduce inflation

Shanghai Daily, April 21, 2011

The yuan rose to a 17-year high yesterday as the market expects China to allow the currency to appreciate faster to curb inflation.

The currency ended at 6.5255 against the greenback yesterday in Shanghai, according to the China Foreign Exchange Trade System. It touched an intraday high of 6.5244, the strongest level since the official and market exchange rates were unified at the end of 1993.

The People's Bank of China set the yuan's reference rate 0.08 percent higher at 6.5294 to the dollar.

The central bank wants the yuan to be more flexible which will help trim the cost of imports and battle inflation, said Deputy Governor Hu Xiaolian on the PBOC's website on Tuesday.

Premier Wen Jiabao said earlier that flexibility in the yuan may play a role in taming rising prices.

China needs a gradual appreciation over the long term but as current conditions aren't conducive to an overly rapid gain, a one-off revaluation "can't be ruled out," PBOC adviser Xia Bin said on his micro-blog at sina.com on Tuesday.

"The pace of appreciation picked up after Xia's comments about a potential yuan's revaluation," said Tommy Xie, an OCBC Bank economist. "A rumor in the offshore market about the yuan's one-time revaluation is spreading."

But Xie expressed his doubts over the one-off revaluation.

"I doubt China will go for a one-time revaluation as I do not see the revaluation being able to help China solve the issue of a massive capital inflow, given that global markets still have excessive liquidity," he said.

Xie also said he believes the currency policy is the least priority tool used to fight inflation.

"We do not see a huge possibility of a yuan revaluation in the near term. Our view that the yuan will appreciate gradually remains intact," Xie said.

China's March inflation rose to a 32-month high of 5.4 percent.