The yuan rose 0.2 percent to 7.8738 against the US dollar in Shanghai yesterday on the back of increasing calls from government officials for the nation to narrow its record trade surplus.
That's the strongest close since July 21 last year, when the fixed exchange rate ended and the central bank announced a 2.1 percent revaluation, according to the China Foreign Exchange Trade System.
The central bank's parity rate for the yuan was set at 7.8781 yuan per US dollar yesterday. The yuan closed on Friday at 7.8896 in the over-the-counter market, its highest level since the current exchange rate system was set up in July last year.
Top economic planner Ma Kai (
Fan Gang (樊綱), a member of the central bank's policy committee, yesterday said the yuan should strengthen further to help ease the trade surplus. A rising currency increases export prices and lowers import costs.
"Yuan gains are fundamentally called for, given the very strong external balance," said Irene Cheung, an economist at ABN Amro Bank in Singapore. "China thinks the trade surplus is big, and they would like to have a more balanced position."
The currency was as high as 7.8763, the strongest since July 21 last year, when the fixed exchange rate ended and the central bank announced a 2.1 percent revaluation, according to Bloomberg data.
It may climb to 7.85 by the end of the year, Cheung said.
The surplus last month helped send China's foreign-currency reserves to US$988 billion at the end of last month, a record for a single country. Chinese exports and the trade gap have been a point of contention with the US and weakened the Chinese government's measures to cool the world's fastest-growing major economy.
"China needs to adjust the exchange-rate policy along with other measures to narrow the trade surplus and slow the growth of the reserves," Fan said yesterday at a seminar in Beijing.
"While the yuan's value shouldn't be too high, it can be higher" than current levels. He didn't say by how much.
The yuan has risen 2.9 percent to the dollar since China ended its fixed exchange-rate regime.
The country needs to narrow its trade imbalance and curb investment and loan growth, Ma said in a speech in Beijing yesterday.
Premier Wen Jiabao (溫家寶) calls the soaring surplus one of China's biggest economic "problems."
Allowing the yuan to keep rising would lead to deflation, said Robert Mundell, a Columbia University economics professor, who won the Nobel prize in 1999.
A stronger yuan would slow exports, which last year made up 35 percent of China's economy. GDP in the third quarter increased 10.4 percent from a year ago after expanding 11.3 percent in the previous three months, the statistics bureau said on Oct. 19. Second-quarter growth was the fastest in a decade.
"Serious damage would be done if the rate of appreciation is increased," Mundell said yesterday at a conference in Beijing.
"There's no doubt about it. There will be a return to deflation with continued appreciation," he said.
The yuan also climbed after China set the highest reference rate since the end of the dollar link last year, Cheung said.
The central bank calculates a daily rate by taking a weighted average of quotes from commercial banks designated to act as market makers in the currency. The yuan is allowed to trade by up to 0.3 percent against the dollar on either side of the so-called central parity rate.
"It's basically reflecting the weakness in the dollar," Cheung said.
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