Yuan on a roll again on bet central bank still favors rise

By Judy Chen  |   2008-7-1  |     NEWSPAPER EDITION

THE yuan completed a 12th quarterly gain, the second-best performer among the 10 most-active currencies in Asia this year, on speculation the central bank will allow the currency to strengthen to stem inflation.

People's Bank of China Governor Zhou Xiaochuan reiterated last Friday that China will gradually increase yuan flexibility after meeting East Asian, Pacific and European central bankers in Rome. The yuan has gained 6.6 percent against the US dollar this year, approaching the 6.86 percent advance for all of 2007.

"Inflation is one motivating factor driving policy makers to allow yuan gains," said Yen Ping Ho, a currency strategist at JPMorgan Chase & Co in Singapore. "We are expecting steady yuan rise for the rest of this year." He said the yuan will rise to 6.5 per US dollar by the end of 2008.

The currency climbed 2.3 percent last quarter to 6.8543 per US dollar in Shanghai yesterday, compared with 7.0120 on March 31, according to the China Foreign Exchange Trade System. It touched 6.8540 yesterday, the highest since a dollar peg was abolished in 2005.

The yuan is allowed to trade by up to 0.5 percent against the dollar each day either side of the so-called central parity rate. It advanced 0.12 percent yesterday, the biggest gain in eight days, Bloomberg News said.

Zhou said yesterday in Basel, Switzerland that he can't rule out an interest-rate rise to curb inflation. The central bank has kept the benchmark one-year interest rate unchanged so far this year since a widening rate differential with the United States would attract more speculative capital.

Rate hike

"After central banks in emerging markets raise borrowing rates, there will be more space for a rate hike in China," said Liu Dongliang, a Shenzhen-based foreign-exchange analyst at China Merchants Bank Co, the country's sixth largest lender.