China says yuan rate to reflect market

Updated: 2007-05-18 15:19

China will allow its currency's exchange rate to increasingly reflect market forces over time, the central bank governor said Thursday, responding to calls from Washington and elsewhere to allow the yuan to strengthen.

"We are gradually moving forward to a more flexible exchange rate," central bank governor Zhou Xiaochuan said at a news conference following the conclusion of the African Development Bank annual meeting in Shanghai.

"So I'm sure the Chinese exchange rate will become more and more flexible, that means reflecting more the market supply and demand relationship," Zhou said.

China ended a direct link between its currency, the yuan, and the dollar in July 2005. The yuan was revalued by 2.1 percent at that time and has been allowed to rise by 5.3 percent against the dollar since then.

Still, U.S. critics continue to claim China keeps the yuan artificially low against the dollar, giving Chinese companies a price advantages over their American rivals.

Yuan closes at record high against US dollar

The yuan had its highest close since the central bank ended a dollar link in July 2005 on speculation the central bank will allow faster appreciation to help narrow China's record trade surplus.

Premier Wen Jiabao Wednesday said his country will gradually boost exchange-rate flexibility and take measures to balance trade flows. A stronger yuan increases export prices and cuts import costs. Vice Premier Wu Yi will meet U.S. Treasury Henry Paulson on May 22-24 in Washington.

"We've seen pretty strong numbers all these months and we're approaching the next strategic dialogue," said Huang Yiping, chief Asia economist at Citigroup Inc. in Hong Kong. "The risks of overheating, over-investment and too much surplus and liquidity all point in one direction. The currency definitely needs to go stronger."

The yuan rose 0.15 percent to 7.6707 against the dollar at 5:30 p.m. in Shanghai, its highest close since the end of the fixed exchange rate, according to the China Foreign Exchange Trade System. The currency has risen 7.9 percent since China dropped the link in 2005.

China's trade surplus ballooned 63 percent in April from a year ago to $16.9 billion, the General Administration of Customs said on May 11. Foreign-exchange reserves rose by a record $136 billion in the first quarter to $1.2 trillion.

Faster Appreciation

Export revenue is flooding the financial market with cash and making it difficult for the government to cool economic growth, which exceeded 10 percent for the fifth quarter in the first three months.

"China will gradually increase the flexibility of its currency regime," Wen said at the African Development Bank's annual general meeting in Shanghai, without being more specific. The economy still faces the risk of excessive liquidity, he said.

The yuan may rise 7.5 percent this year, Huang said. The forecast compares with the 3.5 percent gain to 7.41 by the end of this year, according to the median of 25 contributors in a Bloomberg survey.

"The central bank has allowed faster appreciation and they'll probably continue to do that," Huang said.

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