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China's yuan quickening pace of appreciation against the dollar

The Chinese currency has strengthened 0.8% against the dollar in the last week, its fastest pace is almost a year.

August 16, 2011|By David Pierson, Los Angeles Times

Reporting from Beijing — The change may seem minuscule. But for those who follow China's currency, 0.8% is practically a bonanza.

That's how much the Chinese yuan has appreciated against the dollar in the last week, its fastest pace in almost a year.

Monday showed no signs of slowing down as China's central bank set its so-called parity exchange rate at 6.395 yuan for each dollar, giving the Chinese currency a value of about 15.65 U.S. cents, a record high. (The bank sets the rate in the morning before every currency trading session and allows the yuan to strengthen or weaken 0.5%.)

The yuan has gained 3.1% against the greenback this year and 6.8% since June 2010, when China depegged its currency from the dollar. Many analysts had expected the yuan to climb just over 6% for the year, but the last few days may give them reason to revise on the upside.

The strengthening is welcome news to trading partners who have long contended that China undervalues its currency to keep its exports cheap, giving it an unfair advantage over competitors. Adding fuel to that argument: China's July trade surplus of $31.5 billion was the largest in more than two years.

Diplomacy may be at play as well. The yuan's strengthening comes just before Vice President Joe Biden's arrival in China this week. The last time the so-called redback grew this fast was last September, when Washington was preparing a report on China's currency practices.

But more than anything, analysts said, the strengthening yuan has to do with China's ongoing battle with inflation, which hit a 37-month high in July. Rising prices for basics such as food, fuel and housing have stoked fears of social instability. A mightier yuan would make imports cheaper for Chinese consumers.

The recent downgrade of U.S. government debt by Standard & Poor's has also raised doubts in Beijing about the merits of running large trade surpluses, which increase China's foreign currency reserves. With few safe, liquid options for investing those massive holdings, China has accumulated about $1.2 trillion in U.S. Treasuries.

The trend could also mean that China's central bank, which favors liberalizing the country's financial sector, is gaining ground against pro-export forces. Those include the rich coastal provinces and their patron in the central government, the Ministry of Commerce, which fears that a sharp appreciation of the yuan would put millions of Chinese factory workers out of jobs.

But Li Jie, head of the Reserves Research Institute at the Central University of Finance and Economics in Beijing, disagrees, telling The Times last week that a stronger yuan would help the country's manufacturers by reducing raw material prices and wages.

"It would easily offset the pain of having more expensive exports," Li said.

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