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Inflation and trade surplus driving yuan: Central bank

BASEL (SWITZERLAND) – CHINESE central bank governor Zhou Xiaochuan has said the trade surplus and faster inflation are driving the yuan’s appreciation.

The currency’s gains reflect ‘economic data’, Mr Zhou told reporters yesterday in Basel, where he was meeting Group of 10 central bankers.

The surplus, rising prices and Chinese institutions selling currency reserves ‘may be major factors to the formulation of the exchange rate’, he said.

The yuan has gained about 14 per cent against the US dollar since the end of a peg in July 2005. A stronger Chinese currency would help cool inflation by lowering import costs and slowing money inflows by pushing up export prices.

China’s trade surplus surged 52 per cent in the first 11 months of last year from a year earlier to US$238 billion (S$341 billion).

China is trying to prevent cash from the trade surplus from fanning inflation, asset prices and fixed-asset investment. The People’s Bank of China will keep monetary policy tight this year, Mr Zhou said last month.

The currency has reached 7.263 per US dollar, the strongest since the peg was abandoned.

Standard Chartered this month raised forecasts for the yuan. The currency may gain 9 per cent against the dollar this year and 7 per cent next year, economist Stephen Green wrote in a research report.

‘The primary reason for our change of view is domestic inflation and the increasing disquiet it is causing senior policymakers,’ he said. ‘Beijing is becoming ever more concerned about domestic inflation.’

China consumer prices surged 6.9 per cent in November from a year earlier, the fastest pace since December 1996, as food and fuel costs jumped. Producer prices rose 4.6 per cent, the biggest gain in more than two years.

A record 48 per cent of 20,000 households said prices were ‘too high and difficult to accept’, a quarterly survey released by the central bank last month showed.

About 65 per cent of interviewees expected prices to keep rising this year.

Source: BLOOMBERG NEWS (The Straits Times 8 Jan 08)

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