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China: open to an appreciation of the yuan?

By Jason Dean and Tom Orlik

BEIJING-Based on official comments that have fueled speculation of a faster appreciation of yuan, influential Chinese leaders seem to be admitting the validity of an argument that Washington has long maintained, suggesting that a stronger yuan may help control rising inflation in China.

Many economists have argued that China's currency artificially cheap, but boosts exports, it ends up being counterproductive because it aggravates inflation, partly because the economy is flooded with the earnings from exports.

The Chinese premier, Wen Jiabao, during a meeting last week at the State Council, the Chinese equivalent to a cabinet, cited "Strengthening the flexibility" of yuan's exchange rate as one of several tools the government should make better use of price control. Lower-level officials had raised this argument before, but Wen's comments were unusual for a leading position.

Still, economists say that the change in the language of Beijing, although significant, hardly lead to a marked increase in the value of the yuan.

"China seems to be about to allow a faster appreciation of the currency in response to inflation," he wrote on Tuesday, Mark Williams, China economist at Capital Economics, based in London. But Williams, citing official comments, predicts the yuan will close this year at around 6.20 per dollar, up about 5.25% from current levels, which means only a slight increase in the rate of assessment.

The yuan ended trading day in Shanghai on Wednesday, beating a record high against the U.S. currency. But at 6.5255 per dollar, the yuan has risen only 4.6% since June. This represents a rate of about 0.5% per month, much more slowly than some economists and foreign critics have asked.

In general, experts agree that an appreciation faster could help cool prices at least to some extent. A stronger yuan would reduce the local currency costs of oil, iron ore, soybeans and other commodities that China imported in large quantities, are prices that rose sharply and were passed on to consumers in the form of food and transportation more expensive.

Wen indicated that fighting inflation is the main economic priority for China this year, and the government raised interest rates four times since October, ordered the companies to stop raising prices and put the brakes on bank lending . But in March, consumer prices continued to climb anyway its fastest pace in 32 months.

On Monday, the governor of the People's Bank of China, Zhou Xiaochuan, said the government is trying to reduce the accumulation of foreign reserves. Have soared to over U.S. $ 3 trillion (million million) largely as a result of China's monetary policy, forcing the central bank to buy dollars from exporters and foreign investors. Zhou said that the reserves are injecting too much cash into the economy. "To exceed our reasonable requirements," he added.

China's monetary policy has long been a source of friction with its trading partners especially the U.S., arguing that an undervalued yuan is unfairly benefiting from Chinese exporters.

But the Barack Obama Beijing has also stressed the importance to have a stronger yuan to fight inflation, China's leaders recognize that give greater weight to national considerations to foreign pressure.

most important political leaders such as Wen-those ending deciding on key issues such as monetary policy-not used to see the currency as a tool of monetary policy, analysts say. But that could be changing.

Yet estimate the impact of a stronger yuan on inflation accurately is difficult. Moreover, the relationship between the two has its limits. Higher costs for imported fertilizers and diesel fuel affect the agricultural sector, but most of the food consumed in China is grown locally, not imported.

Even for imported goods, the other tools of government such as price controls, help mitigate the impact of inflation: prices fixed by the government for fuel have risen just 10% this year, while global prices have risen more than 20%.

Source: WSJ