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China to allow faster currency appreciation: analysts

Source:   Time:

BEIJING, Aug. 11 (Xinhuanet) -- China, backed up by rising exports, is expected to allow a faster appreciation of its currency, which also enables the country to stave off hot money inflows and combat inflation.

The People’s Bank of China, the central bank, set the official medium trading price at 6.4167 yuan against one U.S. dollar Wednesday, marking a new record high of the Chinese currency trading the greenback since Beijing embarked on the yuan’s revaluation reform in July 2005.

Wednesday’s value surge marks a steep rise of 168 basic points from Tuesday’s 6.4335 yuan trading one U.S. dollar. So far this year, China’s currency has appreciated by about 3 percent.

Most Chinese experts predict that Beijing would allow an appreciation of the yuan against the greenback at a magnitude higher than the 5 percent last year.

Foreign trade surplus for July hit $31.5 billion, the highest in two and a half years, thanks to higher-than-expected export growth, particularly to the European Union and emerging economies like Indonesia, Argentina, Brazil and India.

The gains in both exports and imports in July – hitting $318 billion according to the General Administration of Customs – tell that China’s economy remains on a solid track, which will give the authorities in Beijing replenished confidence to raise the value of the yuan, experts say.

The $31.5 billion monthly trade surplus is the highest since February 2009 and has come at a time when the world's second largest economy faces uncertain outside demand, typically from sputtering economic engines in the U.S and Japan.

As a countermeasure to independent rating agency, the Standard & Poor’s, downgrading U.S. government credit from the top-notch AAA to AA+ for the first time in history, the Federal Reserve came out Tuesday with a surprise policy statement, asserting America will extend its extremely low interest rates through 2013.

The U.S. central bank hinted it could also launch another round of “quantitative easing” by purchasing more government bonds.

Chinese analysts believe that if QE3 is started, a considerable proportion of the generated credit will flow to China, like QE2, attracted by China's solid growth and higher interest rates.

To thwart the flooding-in of the hot money, Beijing will be forced to increase the value of the yuan, experts say. China’s central bank has amassed a total of more than $3.2 trillion in foreign currency reserves by June this year. The accelerated hot money inflows have ratcheted up yuan supplies to the market as the central bank has to buy them with local currencies.

China faces rising pressure of inflation as inflation has kept building up this year. It reached a 37-month high of 6.5 percent in July.

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