Yuan Set for Weekly Advance; Central Bank Signals Faster Gains

The Chinese yuan headed for a fourth weekly advance as central bank policy makers signaled they'll allow faster gains in the currency to cool the economy.

The yuan traded near the strongest since a link to the dollar was scrapped in 2005 as a local newspaper reported central bank Vice Governor Su Ning as saying the flexibility of the exchange rate will increase this year to help curb inflation.

"The economic backdrop is arguing for faster yuan appreciation," said Craig Chan, a currency strategist at Lehman Brothers Holdings Inc. in Singapore. "The rhetoric coming out from the Chinese shows they want more flexibility."

The yuan gained 0.39 percent to 7.2756 per dollar as of 11:30 a.m. in Shanghai, from 7.3041 a week ago, according to the China Foreign Exchange Trade System. The currency yesterday touched 7.2721, the strongest since the peg ended.

The yuan strengthened about 7 percent last year as China sought to cool inflation from the highest in 11 years and to reduce a record trade surplus.

The currency took two months to advance from 7.6 to 7.5 to the dollar in 2007 and just over a month to gain from 7.5 to 7.4. The yuan passed 7.3 this week for the first time since the end of the peg.

China's central bank will focus on the "real effective exchange rate" to give the yuan a bigger role in international payments, balancing economic growth and curbing rising prices, Vice Governor Su said at a People's Bank of China work meeting in Beijing yesterday, the 21st Century Business Herald reported today.

People's Bank of China Governor Zhou Xiaochuan pledged Dec. 29 to further control liquidity and improve the currency exchange mechanism.

Forward Contracts

China's central bank has also allowed a faster appreciation in the currency to appease U.S. and European officials who blame a weak yuan for global trade imbalances.

The yuan will rise to 6.87 per dollar by the end of 2008, according to the median estimate of 32 analysts surveyed by Bloomberg News. Forward contracts show traders are betting on a 9 percent advance to 6.6750 in the next 12 months.

The central bank calculates a daily reference rate for yuan trading by taking a weighted average of quotes from commercial banks designated to act as market makers in the currency. The yuan is allowed to trade by up to 0.5 percent against the dollar either side of that so-called central parity rate, which was fixed at 7.2779 today.