SHANGHAI • The yuan posted record gains last week on speculation the Chinese currency will be given freer rein ahead of a key economic meet of the globe’s top industrial powers.
The yuan rose to its highest level against the dollar since July 2005, climbing to 7.9522 on the exchange-traded market before slipping back to 7.9540 on Friday.
Traders said the strong gains reflected a trend ahead of a gathering of finance ministers and central bankers from the Group of Seven (G7) that is likely to renew calls for greater flexibility in China’s forex regime.
Britain, Canada, France, Germany, Italy, Japan and the United States are scheduled to meet on September 15 in Singapore, followed by International Monetary Fund (IMF) and World Bank meetings that run through September 20.
“The gradual trend in appreciation is very much in play,” said Callum Henderson, a currency specialist at Standard Chartered in Singapore.
“There has obviously been a lot of focus on either band widening or acceleration of appreciation and we would expect the yuan to appreciate and to continue to accelerate into the IMF and G7 meetings.”
IMF chief Rodrigo Rato urged Beijing, in an online briefing from Washington, to keep its long-held promise to ease its tightly controlled currency.
“We believe it is in the interest of China to implement more forcefully the exchange rate regime it gave itself last year and to let market forces determine things in China in a more clear way,” Rato said on Thursday, a message that could be repeated in Singapore.
Since China revalued its currency by 2.1 per cent in July 2005, ending the currency’s decade-long peg to the dollar, China has repeatedly said it will allow its forex regime more flexibility.
But the yuan has since strengthened less than two percent as a ballooning surplus has become one of the biggest causes of friction with its major trading partners.
China’s export-driven economy saw its trade surplus soar over 40 per cent year-on-year to $14.61bn in July, bringing the seven-month figure to $75.95, up nearly 52 per cent from the same period in 2005.
The European Union, Japan and especially the United States claim that China’s weak currency gives its exporters an unfair advantage and insist that Beijing raise its value.
This week’s rise, set Monday at 7.9719 against the dollar, began with speculative chatter in the Chinese press that the central bank does want to see greater flexibility in the currency.
The official China Securities News speculated on how the central bank could widen the currency’s trading band, fixed at 0.3 per cent on either side of the midpoint. A more supple exchange rate would allow more room for appreciation in the yuan and help ease the problem of excess liquidity, while helping to dampen speculation about an upward move on the currency, it said.
China’s financial system is swimming in excess cash, in part due to expectations that China must let the currency rise to cool an economy that roared ahead at 10.9 per cent in the first half of 2006.
“Currently China’s economy is a little bit overheated and the market is still responding to its strong momentum,” said Wang Xiaoping, a dealer at Xingye Bank in Shanghai.
The yuan has also been helped by the dollar’s softening against Asian currencies on international currency markets, with the exception of the yen, said Claudio Piron, a currency specialist with JP Morgan in Singapore.
The gains also came amid expectations US Treasury Secretary Henry Paulson will renew pressure on China to increase the value of its currency. He is due in China this month.
Meanwhile, US Senators, Charles Schumer, a Democrat, and Lindsey Graham, a Republican, have said if the yuan does not rise by September 30 they will proceed with a vote on legislation to impose a 27.5 per cent tariff on Chinese goods.
