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Yuan Rises Toward 17-Year High as Inflation Spurs Appreciation

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March 4 (Bloomberg) -- China’s yuan rose toward a 17-year high on speculation policy makers will tolerate appreciation to achieve their goal of reining in inflation.

The government “must maintain basic stability in the overall level of prices,” Jia Qinglin, chairman of the Chinese People’s Political Consultative Conference, said yesterday. Rising food and home prices, a widening wealth gap and corruption have fueled concerns of social unrest in China. Consumer price gains quickened to 4.9 percent in January and have topped the government’s 4 percent target for 2011.

“The gradual appreciation of the yuan can ease the rising pressure on consumer prices,” said Kenix Lai, a foreign-exchange analyst at Sun Hung Kai Financial in Hong Kong. She predicts the currency will strengthen 5.6 percent this year to 6.20 per dollar.

The yuan gained as much as 0.1 percent to 6.5665 per dollar, before closing at 6.5686 per dollar at 4:36 p.m. in Shanghai, according to the China Foreign Exchange Trade System. It touched 6.5654 on Feb. 21, the strongest level since China unified official and market exchange rates at the end of 1993.

The central bank set the reference rate for yuan trading 0.04 percent higher at 6.5671, its strongest level since July 2005. The Chinese currency is allowed to trade up to 0.5 percent on either side of the official rate.

‘Steady’ Appreciation

Chinese Premier Wen Jiabao said Feb. 27 gradual appreciation is beneficial to the economy as it will help damp inflation, which reached a two-year high in the fourth quarter of 2010. The government is signaling a potential shift in currency policy as inflation quickens and investors should buy yuan-denominated assets to profit from “steady” appreciation in the currency, according to Standard Chartered Plc.

“The Chinese authorities are ready to use the yuan as a counter-inflationary tool,” Robert Minikin and Eddie Cheung, Hong Kong-based foreign-exchange strategists at the bank, wrote in a report published yesterday. Like Lai, they forecast a year-end exchange rate of 6.20.

Twelve-month non-deliverable forwards rose 0.06 percent to 6.4075 per dollar, reflecting bets the currency will strengthen 2.5 percent in a year, according to data compiled by Bloomberg.

U.S. Treasury Secretary Timothy F. Geithner reiterated yesterday in Washington that China’s currency “remains substantially undervalued.” In a report to Congress on Feb. 5, the Treasury said China had made “insufficient” progress in allowing the currency to appreciate. U.S. lawmakers, including Senator Charles Schumer of New York, complain that an undervalued yuan gives China’s exporters an unfair advantage over American rivals.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net.

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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