Yuan Hits 18-Year High as Brazil's New President Joins U.S. Call to Fix Trade Imbalances

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Brazil's new President Dilma Rousseff joined the chorus of foreign policymakers calling for the Chinese government to allow the yuan to appreciate against other currencies and improve trade imbalances.

Rousseff will raise the issue in April during a visit to the Asian nation for a meeting of the so-called BRIC economies, which also include Russia and India, Trade Minister Fernando Pimentel told Bloomberg News on Monday.

Meanwhile, several events seemed to signal China's government is prepared to loosen the strings it has kept on the currency.

The yuan yesterday (Tuesday) hit an 18-year high against the U.S. dollar, as the greenback sank to 6.6251 yuan.


Also yesterday, a report by the state China Securities Journal cited unnamed industry sources as saying China's currency could appreciate 5% against the U.S. dollar this year

That forecast matched an identical prediction attributed in late December to China Construction Bank senior economist Hwa Erh-cheng in a U.S. diplomatic cable released by the WikiLeaks website, MarketWatch reported.

The gain predicted in the China Securities Journal closely parallels the yuan's situation before the global financial crisis, when many currency experts referred to a 5% annual gain as Beijing's unofficial "speed limit" for the yuan, according to MarketWatch.

The director of the People's Bank of China's (PBOC) statistics and analysis department gave initial weight to the yuan appreciation argument with an article in the Financial News on Dec. 23, when he wrote that a small, gradual appreciation in the yuan would bring more benefits to the Chinese economy than it would cost.

The article by Sheng Songcheng was given prominent position in the PBOC's newspaper, and could signal Beijing's growing confidence that it can let the yuan rise further without severe consequences to its own industrial base, according to The Wall Street Journal.

Yuan appreciation benefits the Chinese economy by pushing exporters to become more efficient and competitive, Sheng wrote.  He also argued that by focusing on exporter profit margins, many parties have "overestimated the possible negative effect of yuan reform and underestimated companies' capability to flexibly cope with the changes."

By emphasizing "small, gradual" appreciation, Sheng's comments also delicately dodged a potential political conflict because he didn't contradict Chinese Premier Wen Jiabao's argument that very rapid appreciation would bring disaster.

"If we increase the yuan by 20% or 40%, as some people are calling for, many of our factories will shut down and society will be in turmoil," Wen said in October.

Chinese officials ended a nearly two-year long de-facto peg to the greenback on June 19 by allowing the yuan to trade more freely against the U.S. dollar, representing a shift in policy in the management of its currency.

But a subsequent campaign by other countries to devalue their currencies has set off a currency war that threatens the economic recovery.

Brazilian Finance Minister Guido Mantega in September vowed to prevent any excessive appreciation by the real as governments worldwide engage in competitive devaluations. But with China's status as the biggest buyer of Brazilian exports and number one source of imports, government officials will focus on China.

"Exchange rate and trade defense will be priority issues with China," Trade Minister Pimentel told Bloomberg. "This is an issue not only for Brazil but for all emerging countries."

Rousseff on Jan 1 outlined her government's determination to protect companies in Latin America's biggest economy from losses due to currency gains in her inauguration address.

"We will act decisively in multilateral forums in defense of a healthy and balanced economic policy, protecting the country from unfair competition and from the indiscriminate flow of speculative capital," Rousseff said after taking office from Luiz Inacio Lula da Silva.

Brazil raised its tariffs on toy imports from China last month to support manufacturers who have been hurt by the real's 37% gain against the yuan since 2008.  In October, the government tripled a tax on foreign purchases of fixed-income securities in a bid to stem currency gains

The yuan appreciated 3.6% versus the dollar last year, while the Brazilian real rose 5%, India's rupee climbed 4.1% and the Russian ruble slid 1.9%.

Analysts said further gains in the yuan can be expected ahead of a state visit to the United States by Chinese President Hu Jintao on Jan. 19.

"China has a history of allowing its currency to appreciate before a major international event," Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong told MarketWatch.

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