07/22/2011, 00.00
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Yuan reaches historic high against dollar

The decline of the green back has favoured the trend, but so has government policy to contain inflation caused by the higher cost of raw materials and imported goods. Still, Beijing has not yet been able to slow the rising cost of living at a time when industrial output slows down.
Beijing (AsiaNews/Agencies) – The yuan hit an all-time trading high against the dollar on Friday for a third day in a row. Many expect Beijing to continue the yuan’s appreciation, which would mark a change in the country’s economic policy.

Spot yuan was trading at an all-time high of 6.4458 against the dollar in late morning trade, up from 6.4516 at the close on Thursday when it also hit an intraday historical trading high of 6.4505. It has now appreciated 5.9 per cent since it was depegged from the dollar in June last year and 2.23 per cent so far this year.

Since China shifted to a more flexible currency system when it announced a landmark revaluation on July 21, 2005, the yuan gained 28 per cent. However, the decline of the US dollar on world markets has also helped the yuan’s rise.

The yuan’s appreciation is also politically significant. The People’s Bank of China tightly controls the Chinese currency, and any important change is a sign of policy choices in Beijing.

Everyone sees the renminbi as undervalued against the US dollar (20-30 per cent in the US) and for years, Western nations have called for its realignment to reflect its true value.

China has so far rejected that demand in order to favour chap exports. However, a higher yuan can contain inflation, which is shaped by the rising cost of imports.

At the same time, China has always handled its currency with great care, with sudden steps backward to prevent speculation. Now Beijing needs to keep inflation in check and boost its industrial sector.

Experts expect industrial output to shrink in July, the first time this year, because of fewer new orders and higher production costs: raw materials, energy but also labour costs. Families have experienced higher food prices, whose rise has far exceeded the rate of economic growth.

This might slow inflation but could cause unemployment in a country with a very thin social safety net.

Hence, many experts believe Beijing must change its economic policies and stop dreaming about never-ending growth.
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