Renminbi central parity rate set at a new high

By Wang Xu (China Daily)
Updated: 2008-06-20 07:34

The central bank set the central parity rate of renminbi at a new high yesterday, a move that may help ease the trade tension with the US and curb inflation.

The Chinese currency climbed for the seventh day to 6.8796 yuan against the dollar, up 27 basis points from a day earlier. The currency has appreciated 6.18 percent this year and about 20 percent since the nation scrapped its peg to the dollar in 2005.

"In terms of currency, our side expressed an understanding and appreciation of the accelerated pace of appreciation of the renminbi," said US Treasury Secretary Henry Paulson at a news conference during the strategic economic dialogue between US and Chinese officials.

Analysts say faster appreciation will also help China to reduce the cost of imports and curb inflation.

Consumer inflation eased slightly but was still high at 7.7 percent in May. However, factory-gate costs are picking up, largely due to rising costs of raw materials such as oil and iron ore. The producer price index hit a three-year high of 8.2 percent last month, and analysts say the inflationary pressure will be passed on to the consumers in six months.

A stronger yuan is expected to reduce the cost of imports, but analysts say the move also risks attracting "hot money", which will force the central bank to issue more currency and thus worsen inflation.

China is expected to draw in as much as $800 billion in hot money by the end of next year, according to a report by Zhong Wei, a professor of Beijing Normal University.

The central bank warned in an earlier report that expectation of further appreciation of the renminbi is attracting hot money. If there is any reversal of that expectation, a huge capital outflow will threaten China's financial security.

Also yesterday, the State Administration of Foreign Exchange (SAFE) said it will more tightly supervise yuan bank accounts held by non-resident individuals or institutions, to curb inflows of speculative capital.

Banks in eight provinces will have to submit data on yuan accounts opened by non-residents to SAFE. Moreover, banks in these regions are required to submit monthly statistics showing outstanding deposits and loans.

(China Daily 06/20/2008 page14)