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Yuan strength points to inflation priority

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SHOULD China have wished for a strong yuan against the US dollar, then its wish has been granted. But the yuan's appreciation in the past two weeks suggests to many China watchers that the People's Bank of China's (PBOC) task of maintaining the yuan's stability is losing out to its priority of controlling inflation.

The yuan has gained more than 1.1 per cent since April 27, when the currency began its spiral against the dollar, and ended on Tuesday at 8.3247.

The yuan has risen more than 4.3 per cent since January 1 last year, when China adopted a single-tier, managed floated foreign exchange system to replace a dual-rate system.

As an indication of less intervention by the central bank, the yuan shot up 251 basis points in a single day, May 2, at the Shanghai-based National Foreign Exchange Centre.

The fluctuation was wild, considering the normal tight trading band of less than 10 basis points in the first quarter of this year.

'If you look at the first quarter money supply figures, the growth rate is higher than that by the end of 1994,' said Baring Securities (Hong Kong) economist Joan Zheng.

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