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Declining dollar lifts yuan to record high

By Xin Zhiming (China Daily)
Updated: 2008-07-17 06:48

The central bank Wednesday set the yuan's mid-point against the US dollar at 6.8128, with the Chinese currency hitting a new post-revaluation high for a fifth straight day.

The gloomy prospect of the US economy has weakened the greenback. In contrast, the yuan has risen about 7 percent this year, more than the margin for the whole of last year.

Exporters and manufacturers, especially the smaller ones, are groaning under pressure created by the rising yuan, with many of them being forced to shut shop.

"We are probably facing the toughest time," said Xue Kun, manager of Beijing Hengtai Yuansheng International Trade, a small food and machinery exporter.

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Analysts, however, said the pressure on exporters is mainly because of the weakening dollar and that the yuan's rise is set to slow down in the second half of the year.

US Federal Reserve Chairman Ben Bernanke has warned that the world's largest economy is facing "numerous difficulties" despite the Fed's aggressive interest rate reductions and other fortifying steps.

Bernanke, testifying before the Senate Banking Committee on Tuesday, sounded another warning that rising prices of energy and food are increasing inflation risks.

This problem looms even as officials try to cope with persistent strains in financial markets, rising joblessness and housing problems.

The situation, he said, poses "significant challenges" for Fed policymakers.

Back home, prices of goods denominated in dollars have risen proportionately to the revaluation of the yuan.

"Many potential clients come inquiring about prices, but leave after realizing our prices are getting higher," Xue said.

"So we suggest shifting to the euro for our transactions because it is more stable."

Other manufacturers have had to negotiate a fixed exchange rate with their trade partners to hedge against currency volatility risks.

"We are left with few options as pressure increases," said Ding Wei, assistant president of Zhejiang Mengna Knitting Co, a major socks maker.

"We have tried to tap the domestic market and add more value to our products through branding."

Such problems have grabbed the attention of the country's top leaders, who have visited several provinces to assess the country's economic health.

The Ministry of Commerce has reportedly suggested slowing down the rise of the yuan to allow traders more time to adjust. "The ministry's proposal is set to influence the decision-making of the top leadership," said Wei Weixian, an economist with the University of International Business and Economics.

This, and repeated appeals by economists and government officials, is expected to slow down the yuan's revaluation. "The yuan may not break the 6.5 mark against the dollar this year," Wei said .

"Traders will be dealt a fatal blow if it does."

"The pace of the yuan's rise could slow down to allow more time to the export sector to adjust," Ken Peng, an economist with the Citigroup in Shanghai, said in a research note.

"But uncertainties over the US economy could pose a problem in curbing its rise."