- first time since China scrapped its fixed-exchange rate
April 10 -- The yuan rose past 7 to the dollar for the first time since China scrapped its fixed-exchange rate in 2005 as policy makers accelerate gains to cool inflation at an 11-year high.
The currency strengthened as much as 0.16 percent to 6.9907, bringing the yuan's advance to 18.4 percent since the end of the peg. U.S. Treasury Secretary Henry Paulson said last week in Beijing it was ``dangerous'' for the exchange rate not to reflect the fundamentals of the world's fastest-growing major economy.
A stronger yuan helps reduce the cost of food imports and slows the nation's export-led expansion. China's consumer prices jumped 8.7 percent in February from a year earlier on higher food costs, raising the risk of unrest as Beijing prepares to host the Olympic Games this summer.
``Inflation can be a very serious threat,'' said Naomi Fink, senior currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo, who forecasts the yuan will reach 6.3 in a year. ``Certainly, China will keep accelerating the pace ahead of the Olympics and I don't think the authorities really want runaway inflation.''
The yuan rose 0.14 percent to 6.9916 at the 5:30 p.m. close in Shanghai, according to the China Foreign Exchange Trade System. The yuan has taken less than six months to break 7 to the dollar after taking 1 1/2 years to climb to 7.5 from 8. Forward contracts show traders are betting on an 11.2 percent advance to 6.2898 in the next 12 months.
The currency's gain against the dollar since the peg ended compares with 5.5 percent for the Taiwan dollar, 9 percent for India's rupee and 34 percent for the Philippine peso. The yen has climbed 11.9 percent and South Korea's won 6 percent.
Inflation Focus
Premier Wen Jiabao pledged ``forceful'' measures last month to tackle inflation and narrow a record trade surplus that has flooded the economy with cash, swelled currency reserves to at least $1.5 trillion and fuelled tensions with the U.S. and Europe, its largest trading partners. The People's Bank of China on March 18 ordered banks to set aside more reserves for the second time this year to slow expansion in money supply.
Billionaire investor George Soros said rising world food costs are ``of grave concern'' and may lead to ``social and political disruptions.''
``China is starting to deal with the problem of inflation by allowing the yuan to appreciate now at a faster rate,'' Soros, who made about $1 billion betting against the pound in 1992, said in a conference call in Washington today. ``You can only do that if you have a substantial trade surplus.''
The yuan will reach 6.7 per dollar by year-end, according to the median estimate of analysts surveyed by Bloomberg News.
Trade Surplus
``The immediate focus on controlling inflation will keep the yuan on its current trajectory through the second quarter,'' said Mirza Baig, a currency analyst in Singapore with Deutsche Bank AG, the world's biggest currency trader. ``In the second half, we may see a more balanced approach towards growth and inflation and thus a slowdown of currency gains is likely.''
China's quarterly trade surplus fell for the first time in more than three years in the three months to March 31, according to calculations based on machinery and electronic trade data released by the Ministry of Commerce. Inflation in March slowed to 8.2 percent, state-run China Securities Journal reported on April 7.
The Singapore dollar climbed to a record high after the Monetary Authority of Singapore unexpectedly decided on an ``upward shift'' in the range in which it manages its currency to curb inflation.
``With demand strong in Asia and inflation rising, China and Singapore see less reason to let their currencies slide alongside dollar weakness,'' Bank of Tokyo-Mitsubishi's Fink said.
Group of Seven
The yuan has fallen 10 percent against the euro since July 2005 and has also declined against the Australian dollar and Brazilian real because of the dollar's slump.
Officials from Group of Seven nations, who meet tomorrow in Washington, will discuss currencies and China needs to foster a market-driven foreign-exchange regime, Treasury's undersecretary for international affairs David McCormick said yesterday.
``China's economy is so large and complex that it's dangerous if you don't have a renminbi that reflects underlying fundamentals,'' Paulson said last week.
U.S. House Democrats asked President George W. Bush last month to use his influence with international agencies to persuade China to revalue its currency. House Ways and Means Committee Chairman Charles Rangel and 14 other Democrats on the panel said the U.S. should apply pressure through the World Trade Organization and International Monetary Fund.
`Sore Spot'
``The value of China's currency has been a sore spot in trade relations,'' said Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co. in Hong Kong. ``Paulson praised China for allowing the yuan to rise at a faster pace since late 2007, but suggested that the currency remains undervalued.''
Since ending the peg, China has managed its exchange rate against a basket of currencies including the euro, yen, and British pound. The central bank set its reference rate for trading today at 6.9920 per dollar. The yuan is allowed to trade up to 0.5 percent either side of the rate.
``The yuan's appreciation will slow after 7 on stabilization of the dollar and slowing exports,'' said Jonathan Anderson, Hong Kong-based chief Asia economist at UBS AG, the world's second- largest currency trader. ``The U.S. is interested in appreciation, but I don't know if they will push for faster appreciation.''
Government bonds were little changed. The yield on the bond due in May 2012 held at 3.74 percent, according to the China Interbank Bond Market. The price of the 3.37 percent security was 98.6 per 100 yuan face amount. A basis point is 0.01 percentage point.
(Bloomberg)
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