Trade-weighted U-turn For China's Yuan Reflects Crackdown On Inflation
The Age
Thursday January 10, 2008
CHINA'S new-found resolve to fight inflation is pushing its currency to record highs, a move that should produce higher export earnings for Australian mining companies.
While the yuan's two-month, 3% rise against the US dollar has attracted most attention - it is the fastest rise since the US dollar peg was loosened in July 2005 - observers believe this masks a more significant change."The real story is the yuan is likely to rise significantly against a basket of currencies," said Citigroup chief Asia economist Huang Yiping."This year we're expecting a 12% real appreciation in trade-weighted terms." Last year the yuan rose 6.4% against the weakening US dollar but fell 5% in real (after inflation) trade-weighted terms - a more meaningful measure for Australian exporters and the Chinese economy. But the yuan's decline against non-US currencies has recently reversed. The Australian dollar rose 13% against the yuan from January 1 last year to November 7 but has fallen 9% since.The dollar was buying just 6.38 yuan late yesterday, compared with an all-time high of seven yuan two months ago.China's artificially low currency had made its exports even more competitive, contributing to China's record trade surplus and the world's dangerously high current account imbalances. Speculators pumped capital into China in the belief the yuan would have to rise, further fuelling Chinese inflation and asset price bubbles. Inflation hit 6.9% in the year to November. Last week, an official survey found inflation had leapfrogged inequality to become the country's most pressing problem. The governor of the People's Bank of China, Zhou Xiaochuan, this week said the yuan's recent surge reflected recent economic data, including the growing trade surplus and inflation. A higher yuan will make it easier for Chinese steel makers to swallow the big expected increase in Australian iron ore prices. More significantly, faster appreciation will lean against the world's financial imbalances and reduce the risk that China's white-hot economy will be derailed by a policy mistake."All of the recent tensions in the world financial markets are in part a byproduct of these large current account imbalances," wrote David Hale, of Hale Advisors, in a report yesterday. Mr Hale said developing countries now accounted for half the world's real economic output and three-quarters of real gross domestic product growth. He predicts the Chinese economy, the primary driver of world growth, will slow this year but remain above 10%. Last month, China's leaders switched monetary policy to "tight" and, it appears, the People's Bank of China gained the upper hand in a long-running internal policy tussle. "The central bank has finally won the argument on the currency," said Stephen Green, of Standard Chartered Bank in Shanghai.
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