Yuan Heads for Weekly Advance as China Signals Further Gains

Expert Advisor

Dec. 14 (Bloomberg) -- The yuan headed for its biggest weekly advance in more than a month as Chinese officials signaled they're willing to allow faster appreciation to cool economic growth.

U.S. Treasury Secretary Henry Paulson said this week during his fifth visit to China that the Asian nation ``recognizes'' the need for greater currency flexibility. Central bank Governor Zhou Xiaochuan said China will use exchange-rate policy to prevent overheating after reports showed inflation at an 11-year high, a widening trade surplus and rising retail sales.

``China is accelerating the pace of currency gains for their own reasons and it's encouraging,'' said Patrick Bennett, a foreign-exchange strategist at Societe Generale SA in Hong Kong. ``The currency needs to take more of a tightening role.''

The yuan rose 0.43 percent this week to 7.3715 per dollar as of the 5:30 p.m. close in Shanghai, compared with 7.3692 yesterday and 7.4030 a week ago, according to the China Foreign Exchange Trade System. The currency touched 7.3640 yesterday, the strongest since a link to the dollar was scrapped in July 2005.

Stocks in Hong Kong and China fell for a third day on speculation the People's Bank of China will boost interest rates. The central bank increased its lending and deposit rates five times this year and raised the amount of cash banks must set aside 10 times.

`A Drastic Measure'

``A rate hike would be a drastic measure but it's quite reasonable for them to increase again,'' said Carlos Cheung, chief currency dealer at Bank of East Asia Ltd. in Hong Kong. ``I would not be surprised if they hiked today.''

China's consumer prices increased 6.9 percent in November, the statistics bureau said Dec. 11, while the trade surplus rose 15 percent to $26.3 billion, the third-highest monthly total, the custom's bureau said the same day. Gross domestic product expanded 11.5 percent in the third quarter, the fastest pace of the world's 20 biggest economies.

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