MercoPress. South Atlantic News Agency

Yuan up 4.3% against US dollar in 2008; 18.3% since Jul 05

The Chinese currency broke this week the psychological benchmark of seven Yuan to the US dollar which could signal a change of policy in Beijing since a stronger currency should help fight inflation and makes food and energy prices cheaper.

The US dollar closed at 6.9916 Yuan at the China Foreign Exchange Trade System in Shanghai on Thursday but has been trading below the 7 benchmark most of the week. So far this year the Yuan has risen 4.3% against the US dollar, and 18.3% since Beijing authorities "un pegged" the Chinese currency from the US dollar moving to a managed float with a link to a trade-weighted basket of currencies and allowing the currency to appreciate by 2.1%. This happened on July 21, 2005. The People's Bank of China set a central parity rate of 6.9920 for Thursday, compared with Wednesday's closing of 7.0017. PBoC began setting a daily central parity rate on January 2006 and allows a trading band of 0.5% on either side of the central parity rate. "It doesn't come as a surprise to see it crack the 7 mark as it was widely expected by the market" said a trader with Bank of China's Shanghai branch. "The weakness of the greenback on Wednesday offered a good opportunity for the central bank to set a stronger central parity rate against the dollar," he said. The greenback plummeted on Wednesday after the International Monetary Fund slashed its forecast on the global economy, which has been dragged down by a "mild recession" in the US fueled by the mortgage crisis and credit crunch. However, the appreciation pace of the Yuan is expected to slow down in the second quarter because if the momentum of the first quarter is sustained "export industries may be hit and that could hurt the economy'', according to market analysts. Lu Zhengwei from the Industrial Bank said the Yuan recent quick appreciation has been triggered by domestic calls to tame inflation and to seek a more flexible foreign exchange rate system. The Yuan appreciation pace became evident in October with the currency gaining 2.3% in the last two months of 2007 with the whole year appreciation reaching 6.87%, which is far above the original forecast of three to five percent. China's main inflation gauge, the consumer price index, topped 8.7% in the last twelve months to February, the highest in more than a decade. The March index, to be released April 17, is also expected to be above the 8% mark. Forward money contracts show that many traders are betting on an even stronger Yuan. Last week visiting US Treasury Secretary Henry Paulson said in Beijing that it was "dangerous" for the exchange rate not to reflect the fundamentals of the world's fastest-growing major economy. However the Yuan has actually depreciated against the Euro and the Japanese Yen, said Li Yang, director of the Institute of Finance and Banking under the Chinese Academy of Social Sciences. "A swifter appreciation of the Yuan may not be a good choice for China at the moment" said Tan Yaling, a research analyst with the Bank of China, according to a report by state news agency Xinhua. A rising Yuan would increase costs for the whole economy and make manufacturers' situation more difficult, especially for the export industry. But Zhuang Jian, a senior economist with the Asian Development Bank, said the country should continue to let the Yuan appreciate against the US dollar despite the risks of an economic slowdown and possible job losses at export-oriented enterprises. Analysts anticipate China's quarterly trade surplus to drop for the first time in more than three years, evidence that declining exports are slowing the country's economic growth.