Yuan Strengthens to Post-’93 High Against Dollar as China Fights Inflation

China’s yuan strengthened beyond 6.5 per dollar for the first time since 1993, supported by speculation the central bank will allow appreciation to help tame the fastest inflation in more than two years.

The currency’s seventh weekly gain, its longest winning streak since July 2008, may damp U.S. criticism of China’s exchange-rate policy before Vice Premier Wang Qishan heads to Washington next month for talks with Treasury Secretary Tim Geithner. Consumer prices in Asia’s biggest economy rose 5.4 percent from a year earlier in March, exceeding the government’s 4 percent goal for this year.

“Inflation is still higher than what the government would like to see,” said David Cohen, a Singapore-based economist at Action Economics, who previously worked for the Federal Reserve. “The central bank is tolerating faster currency appreciation to contain import costs.”

The yuan strengthened 0.16 percent to close at 6.4910 per dollar in Shanghai, earlier touching a 17-year high of 6.4892, according to the China Foreign Exchange Trade System. It rose 0.9 percent this month, the best performance of 2011. In Hong Kong’s offshore market, the currency jumped 0.28 percent to 6.4645, the biggest gain in Bloomberg data going back to Aug. 24.

Photographer: Nelson Ching/Bloomberg

Chinese yuan and U.S. dollar banknotes. Close

Chinese yuan and U.S. dollar banknotes.

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Photographer: Nelson Ching/Bloomberg

Chinese yuan and U.S. dollar banknotes.

The People’s Bank of China set the yuan’s reference rate at 6.4990 per dollar, the strongest level since July 2005. The currency is allowed to trade up to 0.5 percent on either side of the official rate.

Dollar Slide

Twelve-month non-deliverable forwards rose 0.22 percent to 6.3095 per dollar as of 4:40 p.m. in Hong Kong, trading at a 2.9 percent premium to the onshore spot rate, according to data compiled by Bloomberg. Local billionaire Li Ka-shing’s Hui Xian Real Estate Investment Trust, the city’s first listed shares denominated in yuan, began trading today.

The “unusually fast pace” of yuan gains confirms that the yuan is being used to fight inflation, Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong, wrote in a note to clients today. He said there may be a “sharp gain” once 6.50 is breached and recommends buying the yuan against the greenback using non-deliverable forwards.

The dollar weakened this month against all 16 major currencies monitored by Bloomberg as the Fed maintained a near- zero benchmark interest rate and boosted the supply of the U.S. currency by buying Treasuries, a policy known as quantitative easing that is set to end in June.

‘Managed Appreciation’

A halt to the U.S. central bank’s Treasury purchases will alleviate pressure for yuan gains, Huang Zhilong, a researcher with the China Center for International Economic Exchanges, wrote in a commentary published in today’s China Securities Journal. The center is affiliated with the National Development and Reform Commission, China’s top economic planning agency.

Chinese officials told Senate Majority Leader Harry Reid and nine other U.S. senators who visited China this month that the yuan’s “managed appreciation” will continue, according to an April 26 statement on Reid’s website. The senators called for “more aggressive” appreciation, the statement said. The group met with leaders including Vice President Xi Jinping and People’s Bank of China Governor Zhou Xiaochuan.

New York Senator Chuck Schumer, who was on the trip, said yesterday the talks convinced him to push more forcefully for legislative action to curb yuan manipulation that gives Chinese exporters an unfair advantage. Treasury Secretary Geithner and Secretary of State Hillary Clinton are due to meet with Chinese Vice Premier Wang and State Councilor Dai Bingguo during the annual U.S.-China Strategic and Economic Dialogue being held May 9-10 in Washington, the U.S. State Department said this week.

U.S.-China Talks

China’s currency appreciation often gathers pace in the run-up to high-level talks between the two nations. This year’s biggest weekly advance of 0.58 percent was recorded in the week ended Jan. 16, before Presidents Hu Jintao and Barack Obama met in Washington on Jan. 19. The yuan strengthened 1.4 percent in the month before Obama discussed currency policy with Premier Wen Jiabao in New York on Sept. 23.

“China always lets the yuan appreciate faster before they meet the U.S.,” said Kenix Lai, a foreign-exchange analyst at Sun Hung Kai Securities Ltd. in Hong Kong. “It’s like a gift to cultivate a friendly atmosphere for the meetings. This time is no exception.”

China’s Commerce Ministry said on April 22 that there is “relatively large” pressure for the yuan to appreciate, noting that currency gains have had some impact on export orders. The country’s imports exceeded overseas sales by $1.02 billion in the January-March period, the first quarterly trade deficit in seven years, customs bureau data showed on April 10.

Smaller Exporters

“A one-off revaluation is definitely impossible because it will devastate those smaller exporters that are on the edge of life and death,” said Zhao Qingming, a senior analyst in Beijing at China Construction Bank Corp., the country’s second- largest lender. He estimated the yuan will rise by about 7 percent against the dollar for the whole of 2011.

The yuan has advanced 1.5 percent so far this year and will strengthen a further 3 percent to 6.30 per dollar by the end of December, according to the median estimate of 25 analysts surveyed by Bloomberg. That’s the biggest gain projected for Asia’s 10 most-used currencies, polls show.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net; Judy Chen in Shanghai at xchen45@bloomberg.net.

To contact the editor responsible for this story: James Regan at Jregan19@bloomberg.net.

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