Vow to strengthen yuan flexibility ahead of Paulson visit

PUBLISHED : Tuesday, 01 April, 2008, 12:00am
UPDATED : Tuesday, 01 April, 2008, 12:00am

The People's Bank of China (PBOC) has pledged to strengthen its currency flexibility, ahead of a visit by the US treasury secretary to Beijing starting tomorrow.

The PBOC announced yesterday that it would focus on perfecting the yuan exchange rate mechanism in a proactive and controlled manner.

'The [exchange rate] system shall reflect better demand and supply conditions in the market,' a statement said.

The comments are the clearest indication that the country's central bank will use the exchange rate as its main weapon to slow galloping inflation, which was pushed to a 12-year high of 8.7 per cent in February.

'With upstream prices rising quickly, there is clearly more inflation in the system, and some currency adjustment is imminent,' said Stephen Green, the head of China research at Standard Chartered Bank.

Standard Chartered has raised its forecast for yuan appreciation this year from 9 per cent to 15 per cent.

The yuan made its biggest quarterly gain of 4.2 per cent in the first three months of the year on speculation that its advance will quicken, after Premier Wen Jiabao vowed during the recent National People Congress to take strong measures to curb inflation.

The yuan closed yesterday unchanged at 7.012 to the US dollar, according to the China Foreign Exchange Trade System. It touched 7.0107 last Thursday, the highest level since being freed from the decade-long dollar link in July 2005.

'The large one-off revaluation that some in Washington have wished for remains unlikely,' said Jing Ulrich, the chairman of China equities at JP Morgan Securities.

'At the last meeting, the Chinese side took the chance to turn the tables on the US side, warning of the serious global implications of the weak dollar, the recent US interest-rate cuts and the subprime crisis,' she said.

US Secretary of the Treasury Henry Paulson will meet the newly appointed leadership and discuss a broad range of economic issues, including the trade balance and the value of the yuan.

The expansion of the mainland's trade surplus with the US has decelerated from 26.3 per cent in 2006 to 12.9 per cent last year. However, instead of efforts to raise the price tags of Chinese exports, this has more to do with the slowdown in the US economy - which has reduced demand for Chinese exports - as well as the strong demand for foreign imports on the mainland.

Currency dealers estimated that the yuan would strengthen to breach the psychological level of 7 yuan against the dollar during Mr Paulson's trip this week.