China to let yuan rise 5% in 2011

China will let the yuan rise about five per cent against the dollar in 2011 as it needs a stronger currency to combat inflation and avert asset bubbles, an official newspaper said on Wednesday.

But a commerce ministry official warned that any appreciation would do little to narrow China's trade surplus with the United States, a constant irritant in the relationship between the world's two largest economies.

The yuan's gains would be particularly strong in the first half of this year, the China Securities Journal said in a front-page editorial.

"Yuan appreciation will make imports cheaper to reduce the impact of rising commodity prices in the international market, providing relief from inflationary pressure," it said.

The Chinese-language newspaper is a leading voice on domestic economic affairs. Although its views do not represent official policy, they do shed light on the thinking in Beijing.

Investors expect the yuan to rise about 3 percent in a year's time, according to pricing in offshore forwards markets.

But China-based traders expect the yuan to appreciate about 2 per cent in the first quarter of 2011 alone, partly propelled by President Hu Jintao's visit to the United States in mid-January.

While the central government generally tries to paint a picture that it resists US pressure for yuan appreciation, in reality it has often allowed it strengthen ahead of major political events, in recognition of the importance of bilateral ties.

However, Vice Commerce Minister Jiang Yaoping said appreciation would have limited impact on reducing China's trade surplus with the United States.

Jiang noted that much of the imbalance was explained by the processing trade in which multinational companies import intermediate goods and assemble them as finished products in China before exporting them to the United States.

"We have adjusted the yuan's exchange rate since 2005, but we can see that China's trade surplus with the United States, especially the surplus in the processing trade, basically did not change," he told a forum on Wednesday. "That is to say, the yuan's exchange rate has no big impact on the trade surplus."

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