The yuan continued its steady rise yesterday as its central parity rate against the US dollar reached 7.2695.
The rate, the daily weighted average of prices given by market players, hit a new high since China broke its peg against the dollar in July 2005. Last Friday, it was 7.2779 against the dollar.
The yuan's recent rise reflects "economic data", Zhou Xiaochuan, governor of the central bank, said yesterday in Basel, Switzerland, where he was attending a Bank for International Settlements meeting.
The country's trade surplus, rising prices and market sales of foreign currencies by domestic institutions "may be the major factors in the formulation of the exchange rate", Zhou said.
China's trade surplus rose by 52.2 percent in the first 11 months of 2007 from the same period of 2006. Although the growth rate was 6.8 percentage points lower than in the January-October period, analysts said the liquidity pressure remains large.
Meanwhile, galloping food and fuel costs have pushed growth in the consumer price index (CPI), the main gauge of inflation, to 6.9 percent in November, the fastest pace since December 1996.
"The pressure from inflation is the main factor (behind the rising yuan)," said Wang Tao, a Beijing-based senior economist with the Bank of America.
Zhou's remark is in line with the wording of the monetary policy report of the central bank for the third quarter of last year, she said. The report had said the tools of interest and exchange rates would be coordinated to anchor inflation expectations.
The weakening dollar is also a major factor in the yuan's rise, she said. Hurt by the subprime crisis and worries that the US economy may be severely hit, the dollar has remained weak in recent months.
Wang said a rising yuan will help rebalance the domestic economy as it would dampen exports, encourage imports and stabilize inflation.
"China's imports would become cheaper, which will help ease the domestic pressure on inflation," she said, adding that it would also reduce foreign protectionism against Chinese products. Although the appreciation would damage some sectors, it would benefit the overall economy, she added.
But other economists warned that the economy could not afford a fast-rising yuan.
"Most unskilled workers, for example, are in the export-oriented sectors," said Zhang Jun, director of the China Center for Economic Studies at Fudan University.
A fast-rising yuan would lead to mass unemployment, many analysts said.
A stronger yuan may not contribute to a rise in domestic demand, Zhang told China Daily. "There is no correlation between them."
(China Daily January 8, 2008)