China sets yuan at record high to tame inflation

China is set to let its currency, the yuan, to gain in value against the dollar and better reflect market forces after the currency rose 5.5 percent in a whole year after Beijing restarted its liberalization on June 19, 2010.

On Monday, the yuan continued its trajectory of appreciation, as the central bank set the central parity rate – or official exchange rate – at 6.4696 per US dollar, which gained by 20 basis points from Friday. 

Experts say that Beijing is likely to further liberalize the yuan's exchange rates as it believes a stronger yuan helps it contain elevated inflation. Lower import prices, enabled by a strengthening yuan, will reduce wholesale and consumption prices. China's inflation rose to 5.5 percent in May, hitting the highest level in 34 months. 

"We will improve the foreign exchange rate system based on market supply and demand, and steadily increase the flexibility of the yuan exchange rate," the State Administrative of Foreign Exchange (Safe ), the country's foreign currency regulator, said in its annual report for 2010.

Chinese officials have long pledged to forge ahead with market-based reforms of the yuan exchange rate formation regime, but they have ruled out another one-off revaluation, as China did in July 2005 when China launched a reform to better regulate its foreign currency reserves.

China was on track for another solid international payments surplus this year, the regulator said.

Attracted by the prospect of a rapidly growing economy, global capital inflows to China have been rising ever since September 2008 when the global financial crisis erupted. Capital account surplus soared to more than 240 billion dollars last year. 

Beijing has latterly been hesitant to raise interest rates out of worries that higher rates would cause more international hot money to flow to China, which will compromise its efforts to contain inflation. 

China's foreign currency reserves hit a record $3.05 trillion at the end of March, as the central bank bought huge stacks of foreign currencies at the market to maintain a stable exchange rate. 


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