Yuan will be allowed to rise by 5 percent to combat inflation – China



Yuan

Yuan

A Chinese securities newspaper said on Wednesday that the government will let the Yuan rise by 5 percent against the US dollar to prevent asset bubbles from being formed and combat inflation.

Warning against such a move, a commerce ministry official said such a move will significantly narrow down the trade surplus that China currently enjoys. However, the US is expected to welcome such a move since it accuses China of artificially devaluating the Yuan, thus giving its exports an undue advantage.

The China Securities Journal said that the Yuan will see a steep gain in the first half of the year. “Yuan appreciation will make imports cheaper to reduce the impact of rising commodity prices in the international market, providing relief from inflationary pressure”, it said in a front page editorial report.

Although the newspaper does not represent the government officially, the Chinese language paper is known to speak the government’s mind.

The pricing at the offshore forwards market indicate that investors expect the Yuan to appreciate by 3 percent this year.

Since Chinese President Hu Jintao’s visit to the US is scheduled in January, Chinese traders expect the Yuan to gain maximum in the first quarter of the year.

China tries to make accommodate the US before any major political developments although it portrays that it is resisting US pressure to the domestic audience. Chinese Commerce Minister Jiang Yaoping however argued that Yuan appreciation will have limited effect on exports.

Explaining further, Mr. Yaoping said much of the trade imbalance can be attributed to the processing trade where manufacturers import intermediate goods and export them after assembling them locally.

“We have adjusted the Yuan’s exchange rate since 2005, but we can see that China’s trade surplus with the United States, especially the surplus in the processing trade, basically did not change. That is to say, the Yuan’s exchange rate has no big impact on the trade surplus”, he reasoned.

In a meeting with China’s Foreign Minister, the US National Security Advisor reiterated to need to adjust trade imbalances with China. President Obama is expected to host President Hu Jintao in Washington on January 19.

After the meeting between the US National Security Advisor and Chinese Foreign Minister on Tuesday, Washington issued a statement saying the US has “stressed the importance of effective efforts to reduce imbalances in both the global economy as well as in U.S.-China trade”.

US-China trade may exceed £173 billion ($270 billion) in 2010.

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