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Exchange rate to focus on trading partners
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China will shift its focus to managing the yuan's exchange rate against currencies of its biggest trading partners and not just the dollar, allowing for a broader appreciation, former central bank adviser Li Yang said.

China's currency has fallen six percent against the euro since a peg to the US dollar was scrapped in 2005, prompting calls from European officials including French President Nicholas Sarkozy to allow faster gains.

There's a "shift in how the central bank will be watching the rate and the focus of its policy target," Li, head of financial research at the Chinese Academy of Social Sciences in Beijing, said last Friday. The central bank will focus on a trade-weighted "effective" exchange rate, he said, according to Bloomberg News.

Gains in the yuan against more currencies may help China slow growth in its trade surplus, which has flooded the economy with cash and driven inflation to an 11-year high. Gross domestic product grew 11.4 percent in 2007 from a year earlier, the fastest pace in 13 years, driven by exports and investment.

"Currency strength represents the pre-eminent monetary policy tool for the Chinese authorities," Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong wrote in a research note yesterday.

"Investors should brace for rising yuan volatility amid a more pronounced role for other yuan cross-rates."

The yuan fell as much as 0.6 percent against the dollar on the first day of trading after a week-long holiday on February 13, tracking declines in the euro and the yen.

The currency rebounded as the China Securities Journal cited unnamed experts last Friday saying the central bank's focus will shift to the effective exchange rate.

The currency rose 0.28 percent to 7.1623 per dollar at 5:30pm in Shanghai yesterday, the highest since the end of the dollar peg, according to the China Foreign Exchange Trade System.

Since ending the peg, the People's Bank of China managed it with reference to a basket of currencies including the euro and the Japanese yen.

(Shanghai Daily February 19, 2008)

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