MercoPress. South Atlantic News Agency

To help contain inflation, China allows appreciation of the Yuan

The Chinese currency has strengthened 27.5% since 2005

China's currency, the Yuan, strengthened past a key level against the US dollar on Friday, as part of wider efforts to contain inflation on the mainland. The Yuan broke past 6.50 against the dollar, a level not seen since 1993.

Traders and currency strategists believe the move is a sign that China's central bank is prepared to allow the currency to appreciate further. A stronger currency means imported products become cheaper in China.

“The market is very excited,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “Clearly, the People's Bank of China is pushing for a stronger pace of appreciation.”

China's central bank actively guides the level of the Yuan, by effectively setting the rate at which it is allowed to trade. Mr Kowalczyk said the Yuan had gained by 0.9% against the dollar so far in April, roughly equivalent to its entire gain in the first three months of 2011.

Friday's gains mean the Yuan has strengthened by 27.5% since 2005, when Beijing re-valued the currency, effectively ending its peg against the US dollar. That policy of gradual appreciation was temporarily frozen in the aftermath of the financial crisis in 2008.

Now, the spectre of rising prices in China has prompted its leaders to speed up the pace of appreciation, according to analysts.

“High inflation means you need to do more than just raise interest rates,” said Thio Chin Loo, a Singapore-based currency strategist at BNP Paribas. “This just compounds the kind of dollar selling we've been seeing.”

China imports a great deal of food and fuel. A more valuable currency would help reduce those costs, making daily essentials more affordable for the country's 1.3 billion people.

Inflation is a growing social and political problem in China. It hit a high of 5.4% in March. Mr Kowalczyk believes that if the Yuan continues to appreciate at the current rate, it may gain as much as 10% by the year end. (BBC).-