Bloomberg News

China’s Yuan Strengthens Most Since July 2005 Amid U.S. Pressure

October 10, 2011

Oct. 10 (Bloomberg) -- China’s yuan advanced the most since the currency’s July 2005 revaluation on speculation policy makers will tolerate gains after the U.S. said the Asian nation undervalues its currency.

The yuan appreciated 0.6 percent to 6.3486 per dollar in Shanghai, the strongest closing level since the country unified the official and market exchange rates at the end of 1993, according to the China Foreign Exchange Trade System. That was biggest daily increase since China loosened the yuan’s peg to the dollar on July 21, 2005. China’s financial markets were closed for National Day holidays last week.

“China faces pressure to appreciate the currency as the U.S. is pushing for a stronger yuan,” said Kenix Lai, a senior market analyst at Bank of East Asia Ltd. in Hong Kong. “There’s room for China to allow more yuan gains given its relatively resilient economy.”

China has been aggressive in “gaming the trading system,” including intervening to keep the value of its currency artificially low, President Barack Obama said in Washington last week. The People’s Bank of China said on Oct. 4 that the U.S. risks triggering a trade war through legislation that would punish the Asian nation for exchange-rate manipulation.

In Hong Kong’s offshore market, the yuan gained 0.4 percent to 6.3976, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards increased 0.3 percent to 6.3570, a 0.1 percent discount to the onshore spot rate.

The People Bank’s of China set the daily reference rate 0.06 percent weaker at 6.3586. The exchange rate is allowed to fluctuate 0.5 percent on either side of the daily fixing.

Inflation Fight

Stabilizing overall price levels remains a priority after a meeting of the People’s Bank of China’s monetary policy committee, Shanghai Securities News reported today. The National Development and Reform Commission cut fuel prices for the first time this year on Oct. 9 after crude oil costs plunged.

Consumer prices climbed 6.1 percent in September from a year earlier, compared with August’s 6.2 percent inflation rate, according to the median estimate of 22 economists surveyed by Bloomberg before data due on Oct. 14.

“Yuan appreciation is still one of the best tools for China to lower imported prices as inflation hovers at high levels,” Lai said.

Currency Forecast

Obama warned that legislation in the Senate to penalize China risked triggering a trade war. A final Senate vote on laws allowing U.S. companies to seek duties to compensate for the undervalued yuan is scheduled for this week.

The yuan will appreciate by 4 percent to 5 percent against the dollar this year, Li Daokui, an adviser to the People’s Bank of China, said in Chile on Oct. 4.

The currency will gain as China seeks to avert a trade war with the U.S., said Leong Sook Mei, the regional head of global foreign-exchange research at Bank of Tokyo Mitsubishi UFJ Ltd., the most-accurate yuan forecaster in the six quarters ending Sept. 30. Leong predicts 0.8 percent appreciation to 6.3 per dollar by March 31.

“Especially with pressure from the senators, Chinese authorities can still afford to set a stronger yuan for now,” Singapore-based Leong said in an interview on Oct. 6. “One gift China can give to the rest of the world through the end of this year is to allow the yuan to be a bit stronger.”

Commonwealth Bank of Australia, the second-most accurate forecaster, estimates a 1.1 percent advance to 6.28 by yearend. The yuan advanced 1.2 percent in the third quarter, the only one of 25 developing-nation currencies tracked by Bloomberg to gain.

-- With assistance Yumi Teso in Bangkok and Lilian Karunungan in Singapore. Editor: Sandy Hendry

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.


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