Yuan Extends Gains to 20% Since End of Peg

The yuan extended gains to 20 percent since China ended a fixed exchange rate to the dollar in July 2005, easing trade tensions with the U.S. as Treasury Secretary Henry Paulson prepares to meet with Chinese officials.

The currency climbed for a fifth day, reaching 6.8909 per dollar. The yuan's advance since the peg was scrapped compares with a 29 percent gain for the euro against the dollar, 13.2 percent for the British pound and 4.7 percent for the Japanese yen. China has allowed faster appreciation this year to curb import costs and slow inflation. The talks in Annapolis, Maryland today and tomorrow will focus on energy and the environment rather than the currency.

The currency climbed 0.13 percent to 6.8915 a dollar in Shanghai as of 5:30 p.m., from 6.9004 yesterday, according to the China Foreign Exchange Trade System. It's risen 1.7 percent this quarter compared with a 4.2 percent advance in the previous three months.

The yuan may rise to 6.5 by the end of 2008 and register another 20 percent appreciation by the end of 2012, said Piron. Goldman Sachs Group Inc. said in a report yesterday that the yuan will gain about 10 percent in a year as China stems inflation that slowed to 7.7 percent in May from the almost 12- year high of 8.5 percent in April.

China's trade surplus, which rose to a record in 2007, narrowed in May for the first time in five months as a stronger yuan slowed export growth. Foreign-exchange reserves still surged 40 percent to $1.68 trillion in March, flooding the economy with cash and fueling inflation. The central bank has ordered banks to set aside bigger reserves five times this year after raising interest rates six times last year.

The currency has fallen 6.7 percent against the euro since the dollar link was abandoned, lagging behind its gains versus the dollar, prompting European officials to seek faster yuan gains versus the euro.

The Westpac Nominal Effective Exchange Rate, a trade- weighted index for the yuan that includes the euro and the yen, has climbed 5.7 percent so far this year, compared with the 3.4 percent gain for all of 2007. The yuan was little changed against the euro this year.

Yuan Extends Gains to 20% Since End of Peg

TradingEconomics.com, Bloomberg
6/17/2008 6:12:22 AM