China Yuan Rises to Highest Since 2005 as Gains May Cool Growth

China Yuan Rises to Highest Since 2005 as Gains May Cool Growth

http://www.bloomberg.com/apps/news?pid=20601089&sid=aM6dgy8ave6I&refer=china

By Christina Soon

July 2 (Bloomberg) -- The yuan rose to the highest since 2005 on bets China is allowing appreciation to stem inflation, a record trade surplus and economic growth, which the central bank forecasts will be the fastest in 12 years in 2007.

China's yuan has gained 0.7 percent since the government June 11 said the trade surplus increased 73 percent in May. A stronger currency would push up the cost of exports and help reduce the flow of money into the banking system that is spurring lending. The currency closed the last three days at consecutive record highs since a dollar link was abandoned.

``The dollar-yuan's downtrend is definitely intact,'' said Catherine Tan, head of emerging markets at Forecast Singapore Ltd. ``The central bank will just let the yuan strengthen'' to narrow the trade surplus.

The yuan rose 0.08 percent to 7.6070 against the dollar as of 10:29 a.m. in Shanghai. The currency has risen 8.8 percent since China dropped a fixed exchange rate to the dollar in July 2005. It may climb to 7.44 in six months, Tan said.

Gross domestic product may increase 10.8 percent, according to a report by economists at the People's Bank of China's research department, the Beijing-based China Securities Journal reported on June 29. Consumer prices may rise 3.2 percent, the most since 2004 and more than the central bank's 3 percent cap, the report said.

China's trade gap has driven foreign-exchange reserves to an all-time high of $1.2 trillion.

Central bank Governor Zhou Xiaochuan on June 23 said that an increase in borrowing costs isn't ruled out.

Higher interest rates will also raise the appeal of the yuan, Forecast's Tan said. The central bank has boosted rates twice this year.