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China Focus: China's yuan exceeds symbolic 6.50 ratio against USD for first time

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BEIJING, April 29 (Xinhua) -- The Renminbi (RMB), China's official currency, went up 61 basis points on Friday to a new ratio of 6.4990 yuan per U.S. dollar, breaking the symbolic 6.50 ratio for the first time after being preceded by historic highs in the previous two days.

Quickening depreciation of the U.S. dollar is the key reason behind the yuan's accelerated appreciation, said financial expert Tan Yaling.

Analysts believe the new exchange rate will help fight imported inflation. China's Consumer Price Index (CPI) hit a 32-month high of 5.4 percent in March, despite the country's efforts to put a bridle on inflation.

China's inflation control measures have so far included bank reserve requirement ratio (RRR) hikes, interest rate hikes and open market operations.

China will use a combination of its exchange rates, interest rates and RRR hikes to curb inflation, said Li Daokui, a member of the monetary policy committee of the People's Bank of China, the country's central bank.

As global commodity prices continue to soar, yuan appreciation will help relieve inflation, boost economic restructuring and aid in maintaining economic stability, said Fan Gang, a Chinese economist.

The yuan exchange rate has appreciated by 1.8 percent against the U.S. dollar this year. It has appreciated by nearly 5 percent against the U.S. dollar since June 19 of last year, when the central bank announced that it would make changes to its exchange rate formation mechanism to make it more flexible.

China's authorities have expressed on many occasions that they will further increase the flexibility of the yuan's exchange rate.

Hu Xiaolian, deputy governor of the central bank, said in an article posted on the central bank's website on April 18 that China would continue to improve the yuan exchange rate formation mechanism and enhance exchange rate flexibility to ease imported inflation pressures.

"Chinese currency authorities will rely on exchange rate policies to fight inflation in the coming months," said Australia and New Zealand Banking Group (AZN) economist Liu Ligang.

International commodities are priced in U.S. dollars and yuan appreciation will help to cut down on imported inflation, Liu said, citing an AZN research from January 2010 that stated the yuan appreciation would cause the Producer Price Index (PPI) to decline.

Meanwhile, the market is abuzz with speculation about one-off appreciation after People's Bank of China advisor Xia Bin mentioned the idea in an online question-and-answer session on April 19.

However, he also said that swift appreciation could harm economic and social stability.

"Overly fast appreciation and one-off appreciation will not happen. If these occur, Chinese exporters will not be able to take the pressure and the influx of 'hot money' will dampen the central bank's efforts to check inflation," said Liu Dongliang, an analyst with the China Merchants Bank.

Chen Gong, chief economist of the Anbound Group, a Beijing-based consulting firm, said the yuan exchange rate should maintain stable momentum and that one-off appreciation would hurt the Chinese economy.

In China's foreign exchange spot market, the yuan is allowed to rise or fall by 0.5 percent from the central parity rate each trading day.

The central parity rate of the yuan against the U.S. dollar is based on a weighted average of prices before the opening of the market each business day.

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