China’s yuan strengthened, touching a 17-year high, on speculation the central bank will allow the currency to appreciate as part of measures to contain the fastest inflation in more than two years.
The People’s Bank of China increased the amount of cash lenders are required to set aside as reserves by half a percentage point effective on Thursday, it said on its Web site yesterday, pushing the requirement to a record 20.5 percent for the biggest banks.
China will continue tightening monetary policy for “some time,” central bank Governor Zhou Xiao-chuan (周小川) said on Sunday, a day after the nation reported -inflation that was the quickest since July 2008.
“The country will focus more on non-interest-rate measures, including more reserve-ratio hikes to drain cash domestically and faster currency appreciation to contain imported inflation,” said Dariusz Kowalczyk, a Hong Kong-based economist at Credit Agricole CIB.
He expects at least one more reserve-ratio increase this year to 21 percent.
The yuan climbed 0.06 percent to 6.5287 per US dollar as of the 4:30pm close in Shanghai yesterday, according to the China Foreign Exchange Trade System. The currency touched 6.5276 earlier, the strongest level since the -country unified official and market exchange rates at the end of 1993. In Hong Kong’s offshore market, the yuan gained 0.02 percent to 6.5215.
The People’s Bank of China set the currency’s reference rate 0.01 percent weaker at 6.5310. The fixing was 6.5301 on Friday, the strongest level since July 2005.
Twelve-month non-deliverable forwards declined 0.02 percent to 6.3830 per US dollar, reflecting bets the yuan will strengthen 2.3 percent in a year from the onshore spot rate, according to data compiled by Bloomberg. The contracts reached 6.3615 on April 8, the highest level since the same month in 2008.
China’s economy expanded 9.7 percent from a year earlier in the first quarter and consumer prices rose 5.4 percent last month, the National Bureau of Statistics of China said on Friday. Economists expected growth of 9.4 percent and a 5.2 percent inflation rate, based on median estimates in Bloomberg surveys.
Asia’s largest economy has room to raise interest rates and banks’ reserve-requirement ratios this year as the country faces difficulties achieving the 4 percent goal for consumer price increases this year, the China Securities Journal said in a front-page editorial yesterday. The yuan may continue to gain appropriately, the editorial said.
The nation’s third interest-rate increase this year may come as soon as next month and policy makers may consider allowing faster appreciation of the yuan to reduce the cost of imported commodities such as oil, according to Societe Generale SA. A flexible yuan will become a very effective tool for curbing inflation, the China Business News reported yesterday, citing former US Treasury secretary Henry Paulson.