Reply #16: Yuan Climbs After China Pledges New Policies to Curb Inflation

[Ghost Dog]

Feb. 20 (Bloomberg) -- The yuan rose for a fifth day after China's central bank pledged new policies and increased currency flexibility to curb the fastest inflation in 11 years.

The currency rose to the highest since a link to the dollar ended in July 2005 after the People's Bank of China said in a five-year plan released yesterday that it will ``innovate'' to address problems including growth in money supply. Global commodity prices surged to a record yesterday, as oil jumped above $100 a barrel and copper rallied.

``The constant message is the need to mop up excess liquidity,'' said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong. ``Commodity prices are also a threat so they will need currency strength as an offset.''

The yuan advanced 0.1 percent to 7.1510 per dollar as of 1:27 p.m. in Shanghai, from 7.1580 yesterday, according to China Foreign Exchange Trade System. The currency gained 2.2 percent this year after rising about 7 percent in 2007.

Consumer prices rose 7.1 percent from a year ago in January, the statistics bureau said yesterday. Accelerating inflation adds to evidence the world's fastest-growing major economy is at risk of overheating. The nation's trade surplus rose more than forecast in January and money supply grew at the quickest pace in 20 months. Oil surged above $100 a barrel yesterday.

Import Prices

China is stepping up the pace of yuan appreciation to bring down the cost of imports and help curb inflation, driven higher by the worst snowstorms in five decades. It raised interest rates six times in 2007 and has boosted the proportion of deposits that banks must hold as reserves to 15 percent.

``We will further improve monetary policy controls, continue to use quantitative measures, widen usage of price- related policy tools and increase innovation in monetary policy measures,'' the central bank said in the report, without elaborating.

China's currency will rally to 6.70 per dollar by the end of 2008, according to the median estimate of 27 analysts surveyed by Bloomberg News. Forward contracts show traders are betting on a 9.3 percent advance to 6.55 in the next 12 months.

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