Yuan rebounds again
By Xin Zhiming
2008-06-17

The central bank yesterday set the mid-point of the yuan's exchange rate at 6.9028 against the dollar, a bit weaker than the post-revaluation high of 6.9015 on Thursday and 6.9018 on Friday.

The yuan has now appreciated 17.49 percent since it was revalued by 2.1 percent to 8.11 against one dollar on July 21, 2005, when China de-pegged its currency from the dollar and allowed it to float within managed bands.

Meanwhile, the yuan continued to rebound against the dollar in the offshore forwards market yesterday, reflecting strong anticipation for further appreciation.

Yesterday's one-year dollar/yuan non-deliverable forwards (NDF) pointed to a yuan appreciation of 6.12 percent against the dollar in the next 12 months, compared with 4 percent indicated by NDF trading early last week.

Analysts said China's need to combat still serious inflation may feed stronger expectation for further yuan appreciation. State leaders reportedly vowed at a Friday meeting to take every measures possible to curb inflation.

The two-day session of the Sino-US Strategic Economic Dialogue, which starts today, also stoked such market sentiment. US officials have said they will continue to press China to allow the yuan to appreciate faster.

"Both factors work in strengthening such anticipations," said Liu Dongliang, foreign currency analyst with the China Merchants Bank. "But the former would be a mid-term one and more crucial."

In May, China's inflation dropped to 7.7 percent, but the producer price index, which gauges factory-gate prices that will ultimately be passed on to consumers, rose to 8.2 percent, the highest in more than three years. It indicates accumulating pressure on consumer inflation in the coming months, analysts agreed.

It is hard for the authorities to raise the interest rate for fear that it will encourage an influx of hot money, or speculative capital, given the gap between the US and domestic interest rates, Liu said. Raising the reserve requirement ratio, or the money lenders must keep in reserve, has not worked very effectively. "Yuan appreciation can, in an extent, help ease the inflationary pressure."

"But it will not be a non-stop appreciation," said Wang Li, a researcher at the Chinese Academy of International Trade and Economic Cooperation of the Ministry of Commerce. "It would not be very sharp as in the first quarter of the year and fluctuation would be normal."

As the expectation for faster yuan appreciation strengthens, Liu warned that while it may not fundamentally solve the problem of high inflation, faster appreciation may put the country's trade at stake.

"The previous sharp appreciation has not effectively contained inflation," he said. "In Guangdong, meanwhile, many enterprises have gone bankrupt."

(China Daily 06/17/2008 page14)