Chinese yuan hits new high versus U.S. dollar

Associated Press | December 4, 2006

SHANGHAI — The Chinese yuan rose to a fresh high against the U.S. dollar Monday as reports cited officials urging diversified investments of the country's $1-trillion in foreign exchange reserves.

The central bank's official “parity” rate for the yuan was set at 7.824 per dollar Monday morning, compared with an official rate of 7.8331 on Friday. The yuan has gained about 3.5 per cent against the dollar since the current foreign exchange system was set up in July 2005.

The parity rate, set each trading day by the People's Bank of China, is a weighted average of prices given by market makers, excluding the highest and lowest offers.

China tightly controls trading in the yuan, limiting its daily movements to 0.3 per cent above or below the parity rate. But in recent weeks the yuan has gained steadily against the dollar as the U.S. currency has faltered in global foreign exchange markets.

The yuan's advance comes as China and the U.S. prepare to hold bilateral economic talks Dec. 14-15 in Beijing, where U.S. Treasury Secretary Henry Paulson and other U.S. officials are expected to push for further loosening of controls on the Chinese currency.

Meanwhile, China's state-controlled media have carried reports noting the potential risks from the dollar's overall decline to the country's $1-trillion foreign exchange reserves, which are thought to be weighted toward U.S.-dollar denominated Treasuries and other investments.

Those reports have helped fan market speculation that a sell-off of dollar assets by China might drive the dollar's value still lower.

The state-run newspaper China Securities Journal on Monday carried an article by an economist at the Development Research Center, a think-tank attached to China's cabinet, that reiterated calls for strategic management of the country's foreign exchange reserves.

The economist, Xia Bin, suggested that the Ministry of Finance issue yuan-denominated bonds to buy foreign reserves and then use the funds to invest overseas.

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