The yuan remained strong at a new central parity rate of 7.1998 against the US dollar yesterday, compared with 7.202 on Tuesday, after analysts said rising inflationary pressure may accelerate appreciation.
But some economists said resorting to yuan appreciation to ease inflation might not be effective.
The yuan was traded at 7.1923 around midday yesterday, up from 7.1945 at the close on Tuesday. Analysts said the weakening dollar is an important factor behind the rising yuan, as US subprime woes worsen.
Recent bad weather in central and eastern China that's disrupting transport is set to push up food and energy prices, which will also add to yuan revaluation pressure, analysts said.
"Coal prices have risen sharply in January, and we are likely to see price spikes in more goods in the coming weeks," said Wang Tao, a senior economist with Bank of America.
Wang said China's CPI, the main inflation gauge, is likely to rise above 7 percent year-on-year in January and February.
Analysts said policymakers have been reluctant to continue raising the interest rate to help curb inflation, given the opposite movement between the interest rates of the yuan and the US dollar in recent months. They raised the rate six times last year and the banks' reserve requirement ratio, or proportion of money commercial banks must hold in reserve, 10 times.
Policymakers have instead opted to allow faster yuan appreciation to reduce inflationary pressure, said Ha Jiming, chief economist at China International Capital Corp. "There's been an attitude shift recently."
"Against this backdrop and a deteriorating US economic outlook, we expect the yuan to continue appreciating faster against the US dollar over the next two months," Wang said.
Zhang Lan, head of research at Changjiang Securities, said even if the yuan appreciates faster, it may not do much to help curb domestic inflation.
"I expect inflation will go along with the rising yuan."
The yuan's appreciation will help reduce import prices, making them cheaper, but its role in curbing overall inflation will be "limited", he said.
"The driving forces of inflation are raising food and energy prices and the way out would be to increase supplies, not raise the value of the yuan."
The government has vowed to take every possible measure to break the weather-induced transport bottleneck and increase supply to anchor the market as the Spring Festival consumer period draws near.
(China Daily January 31, 2008)
