Wednesday January 12, 2011

China likely to allow quick appreciation of currency

BEIJING: China is likely to let its tightly controlled yuan appreciate at a faster clip this year as part of heightened efforts to quell inflation, a Reuters poll showed on Tuesday.

The yuan is expected to hit 6.3 per dollar by the end of 2011, a rise of 5.4% from Monday's spot rate, compared with last year's 3.6% annual rise, according to the poll conducted ahead of President Hu Jintao's visit to Washington next week.

The currencies of India and Russia will appreciate modestly over the next 12 months, while the Brazilian real is expected to weaken slightly, according to median predictions from more than 30 analysts.

With economic power shifting to the emerging world, the BRIC nations have assumed ever greater importance. China is also inviting South Africa, Africa's top economy, to join the club. China, the world's second largest economy, is under pressure from its trading partners to allow a faster rise in the yuan.

Beijing will nudge the yuan up 0.6% in the next month, 1.3% in the next three months and 2.4% in the next six months, the poll of more than 40 economists and strategists showed.

The poll reinforced the perception that the government is tolerating faster yuan rises to help put a lid on inflation, which raced to a 28-month high of 5.1% in November.

“China's inflation is accelerating, and a stronger exchange rate along with higher interest rates is needed to bring about tighter financial conditions and more sustainable growth,” said Jonathan Cavenagh, currency strategist at Westpac in Singapore.

“Chinese growth is still expected to remain robust and this leaves room for further currency strength to help the process of gradual orientation of growth away from the external sector to internal sources.”

Richworld policymakers say China keeps its currency undervalued to give its exporters an unfair advantage. US President Barack Obama, seeking to boost exports and stimulate job growth, is expected to push Hu to let the yuan rise more quickly.

But data on Monday showed China's trade surplus narrowed in 2010 for the second straight year, giving Beijing grounds to rebuff such calls.

The analysts polled are seemingly more bullish on the yuan than investors. Benchmark one year offshore non deliverable forwards imply a 2.8% rise in the yuan against the dollar over the coming 12 months. Reuters

China said in June it would make the yuan more flexible when it unshackled the currency from a twoyear dollar peg, but it has been treading cautiously despite heavier foreign pressure.

China allowed the yuan to gain about 7% annually between July 2005, when the currency was formally depegged from the dollar, and July 2008, when the quasifixed link was restored to help Chinese exporters weather the global storm.

For Another perspective from the China Daily, a partner of Asia News Network, click here

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