Yuan's climb so far exceeds appreciation made last year

By Judy Chen  |   2008-7-12  |     NEWSPAPER EDITION

THE yuan's gains this year exceeded its advance in all of 2007 as China pledged to maintain efforts to strengthen the currency to stem inflation and narrow the trade surplus.

The currency yesterday climbed to the highest since authorities abandoned a US dollar link in July 2005 as Premier Wen Jiabao reaffirmed this month that the battle against inflation remains the government's top priority. United States Treasury Secretary Henry Paulson on Thursday urged China to accelerate yuan appreciation, calling it "a key" to the country's economic progress.

"Inflation is still a huge issue," said Naomi Fink, a Tokyo-based senior currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. "China cannot afford to support exports by stopping the yuan rise. The dollar's strength would only aggravate already existing inflationary pressure."

The yuan gained 0.36 percent this week to 6.8340 per US dollar yesterday in Shanghai, from 6.8589 on July 4, according to the China Foreign Exchange Trade System. It touched 6.8331 yesterday. The currency has gained 6.88 percent this year, more than the 6.86 percent gain in 2007.

It rose 2.5 percent in the past three months, the best performance among the 10 most-active currencies in Asia excluding the yen, Bloomberg News said.

Inflation accelerated to 8.1 percent in the first five months of the year, from 4.8 percent for all of 2007, posing a threat to economic stability as the nation prepares to host the Olympics next month. The strengthening of the yuan has helped lower import costs as oil prices reached a record US$145.85 a barrel on July 3 and narrow a record trade surplus that has flooded the economy with cash.

Trade surplus

The June trade surplus narrowed 21 percent to US$21.4 billion from a year earlier, the customs office said on Thursday.

The yuan is "obviously substantially undervalued," Dominique Strauss-Kahn, managing director of the International Monetary Fund, said on Wednesday.

"Solid export growth and the still-large trade surplus should support a stronger effective yuan exchange rate going forward," Song Yu, an economist at Goldman Sachs Group Inc in Hong Kong, said in a report on Thursday.

The Westpac Nominal Effective Exchange Rate, a trade-weighted index for the yuan, has climbed 6 percent this year, almost double the 3.4 percent gain last year.

"The biggest challenge for the central bank is to deter bets on yuan gains while allowing its steady appreciation," said Liu Dongliang, a foreign-exchange analyst in Shenzhen at China Merchants Bank Co, the country's sixth-largest lender. "Wider fluctuations would keep some hot money out of the country by raising speculators' transaction costs," Liu said.