Yuan hits new high before talks
The yuan closed at a new high of 7.3797 to the US dollar yesterday, on the eve of the third round of the Sino-US Strategic Economic Dialogue in Beijing, where United States negotiators are expected to renew calls for a faster appreciation of the yuan.
The yuan rose 156 basis points, breaking the high set on November 23, when it closed at 7.3992. It was the 74th new high the yuan has recorded this year, during which it has risen 5.7 per cent.
Meanwhile, the dollar strengthened yesterday to a near one-month high against the yen before an expected interest-rate cut by the Federal Reserve.
'The central government realises there is more upside for yuan appreciation than they were previously considering,' said Pu Yong-hao, an executive director and the head of Asian research at UBS.
However, he added, 'domestic considerations must come first. The yuan increase will allow the price of imports, a key driver of inflation, to be lower.'
Mr Pu said he expected the yuan to appreciate between 6 and 10 per cent next year. Other economists also revised their yuan forecasts. DBS said it expected the yuan to rise 10 per cent next year from the original estimate of 5 per cent.
However, economists ruled out any one-off increases in the yuan, even though the central government changed its monetary policy stance recently from 'prudent' to 'tight' for the first time in 10 years.
'The [yuan's] sharp rises are usually short-term,' said Jun Ma, the chief economist for Greater China at Deutsche Bank. 'We cannot expect major change in the yuan mechanism.'
Monetary controls had failed to stem the tide of foreign exchange into the mainland economy and the US should tighten its own belt to help level the balance of payments, central bank chief Zhou Xiaochuan said yesterday. But he promised Beijing would pursue its exchange rate reform and increase the flexibility of the yuan next year.
'People criticise our foreign exchange policy, saying we are not doing enough on foreign exchange control, but actually we have done a lot to adjust our policies,' Mr Zhou told a forum in Beijing.
'However, the trade surplus is still growing very quickly. If savings rates in the US could be a bit higher and life there a little less luxurious, that could be helpful for adjusting the imbalance.'
The mainland's total trade surplus for the first 11 months of this year hit US$239.3 billion, far above the US$177.5 billion recorded for all of last year.
Mr Zhou admitted that the nation's role as the workshop of the world economy had overwhelmed the central bank's attempts to control domestic money supply and that the trade surplus had grown much faster than expected.
But he signalled there would be no dramatic increase in monetary tightening.