china lets yuan rise against the greenback

  1. 1,544 Posts.
    About time! Yuan has been intentionally devalued against the Greenback (USD) for years.

    http://www.theaustralian.news.com.au/story/0,25197,23524787-36375,00.html

    James Areddy | April 12, 2008

    CHINA has allowed the country's currency to rise to its highest level against the US dollar in more than a decade, despite weakening global growth, an indication that Beijing views rising inflation as a bigger danger than the risk of an economic slowdown.

    On Thursday, the US dollar slid to less than seven yuan for the first time since the early 1990s, ending Shanghai trading at 6.9916 yuan, down from 7.0017 yuan in the previous session.

    The yuan has now gained more than 18 per cent against the US dollar in less than three years, although it has been flat or even depreciated against other major currencies, such as the euro.

    The yuan's increasing value against the US dollar is just one indication of how the world's fastest-growing major economy is continuing to expand at a brisk pace.

    The currency gains came shortly before China's Government raised its growth estimate for last year's gross domestic product to 11.9 per cent from 11.4 per cent.

    The currency trend is also being driven by weakening confidence in the US dollar, as the global economy's traditional economic engine loses steam.

    Continued economic strength means that Beijing needs to worry less about the negative effects of a more valuable yuan, such as the potential damage to China-based exporters who have created tens of millions of jobs.

    China's economic growth is expected to slow this year, probably to single digits, for only the second time since 2002. But it will remain red-hot by most standards.

    The International Monetary Fund forecasts China's economy will expand 9.3 per cent this year.

    China's reluctance to fully expose its currency to market forces, which would drive up the yuan's value even further, has been a major source of criticism from its trading partners, who argue that it makes Chinese exports unfairly cheap. But even some foreign critics are taking note of the currency's quickening rise since last year.

    "It's going to go a lot higher," says Jim Rogers, a US investor and self-described China bull.

    Mr Rogers said the Chinese currency had the potential to strengthen to just two yuan to the US dollar - a two-times rise from current levels - noting that the Japanese yen once made a similar rise from 500 to 100 to the US dollar, albeit over a number of years.

    Others are not quite as bullish. Another key measure of sentiment - a derivative product traded by banks around the world called the non-deliverable forward - values the US dollar at 6.4 yuan a year from now, which would represent a further gain of 9.2 per cent for China's currency by this time in 2009.

    So far this year, the yuan has been rising faster than that, at a 15 per cent annualised rate.

    The rising yuan, and the strong Chinese economy, mean overseas investors are pumping money into the country at a rapid clip - and could be encouraging them to do so quickly before assets become more expensive.

    During the first three months of this year, foreign direct investment surged 61 per cent to $US27.4 billion ($29.4 billion) after totalling nearly $US75 billion last year.

    Many economists say that a better read of China's exchange-rate policy comes from comparing it with a range of currencies. By one measure, the yuan has been far less impressive; it has barely budged this year against a basket of currencies of China's trading partners. Indeed, the yuan has been weakening against the euro.

    Still, Chinese exporters have been feeling the pinch. Small Chinese manufacturers are cutting jobs as they lose export orders because their products cost more in US dollar terms, and are clamouring for Beijing to ease the pain.

    But so far their concerns appear to be secondary for Beijing.

    The fact that the Government, which retains firm control of the yuan, has permitted the yuan to rise more quickly, analysts say, reflects a growing need to offset growing domestic inflation.

    A stronger currency would help China absorb high global prices for commodities such as crude oil and iron ore by making them cheaper in yuan terms, and avoiding the challenge of keeping those rising prices from turning up consumer inflation.

    Already, inflation has clocked in at the fastest pace in 12 years in recent months, including the February rise in the consumer price index of 8.7 per cent from the year before.
 
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