Chinese currency at 18 year high ahead of Vice-President's visit to US

[1]

Chinese currency yuan rose to an 18-year-high on Friday, as its Vice-President Xi Jinping, expected to take over as President next year, geared up for a trip to the United States next week.

The People's Bank of China set the yuan's central parity rate against the US dollar at 6.29 after the rate rose for two consecutive trading days, according to the China Foreign Exchange Trading System.

"The exchange rate will see more fluctuations, although the positive outlook for the Chinese economy has sparked expectations of a strengthening of the currency," said Zhuang Jian, senior economist with the Asian Development Bank.

He predicted that yuan may rise about 3 per cent this year. However, that would be slower than the 6 per cent against the dollar in real terms last year.

Deputy Foreign Minister Cui Tiankai said on Thursday that Xi's visit is an important opportunity to enhance mutual trust between China and the US.

He also hoped that the visit would help remove hurdles from Sino-US trade, including restrictions on US exports of certain high-tech products and obstacles to Chinese investment in the US.

Xi is scheduled to meet US President Barack Obama and other high-level leaders during his visit.

Appreciation of Chinese currency against the dollar is the key demand of US, which accuses China of keeping its currency value low to cash on exports.

"The rise largely reflects market supply and demand," China Daily quoted Zhang Jianping, senior economist at the Institute for International Economics Research as saying.

He said the market expects the Chinese currency to rise because the economy remains positive and the government has adopted a rather tight monetary policy.

Il Houng Lee, senior resident representative at the Beijing office of the International Monetary Fund, said the currency will go forward over the medium term but in the short term it will see more ups and downs.

A report by IMF's Beijing office on Monday said upward pressures on the currency have diminished recently.

However, as the current account still has a sizable surplus of US dollars, and foreign direct investment remains strong, China is supposed to resume the strong pace of accumulation of foreign-exchange reserves, the report said.

The country's foreign-exchange reserves increased by USD 11.7 billion between October and December, regardless of changes in the exchange rate and asset prices, the State Administration of Foreign Exchange said on Friday.

China has over USD 3.20 trillion forex reserves. Its capital and financial account suffered a deficit of USD 47.4 billion in the fourth quarter of 2011, from a surplus of USD 66.2 billion in the third, indicating net capital outflows.

Analysts said the exchange-rate fluctuations are closely connected with the crisis-affected economic scenario overseas and with speculative activities.