As fighting against inflation is the top priority of China´s policymakers, the appreciation of China´s currency, RMB, is expected to accelerate, analysts hold.

The central parity rate of RMB against US dollar has been hovering on high levels since April. In the 11 trading days by April 19, the central parity rate set new highs in 8 days and appreciated 0.39 percent accumulatively in half month.

As the European Central Bank raised interest rates for the first time in the last three years, the US dollar index showed a new round of depreciation in international currency market, the RMB also followed o the currencies to advance against US dollar. Zhou Xiaochuan, governor of China´s central bank, said on April 16 during the Boao Forum for Asia that China has applied exchange rate in the battle against inflation and it has appreciated at a relatively fast pace in previous time period.

Since last year, with China´s monetary policy returning to prudent to curb inflation, the central bank has raised the required reserve ratio (RRR) ten times and hiked benchmark interest rates four times. After interest rate and RRR have been used intensively, it´s possible for exchange rate to play the role.

An important reason behind this round of price rise is imported inflation due to high prices of staple commodities and raw materials on the international market. Meanwhile, as the United States retains its easy monetary policy, it´s expected that emerging countries will suffer from pressure of imported inflation in a long time period. It´s believed that a properly faster RMB appreciation will help relieve the pressure.

However, some analysts warn that if the exchange rate tool is overused, more hot money would flow into China. On the expectation for RMB appreciation, China continued to see surplus in banks´ foreign exchange settlements and sales in the first quarter of 2011. This means that net capital inflows under the trade account still remain.

According to data from the State Administration of Foreign Exchange (SAFE), the surplus of Chinese banks´ foreign exchange settlements and sales for their customers reached 93.3 billion US dollars in the first two months of this year.

Since 2010, China has strengthened measures to crack down on hot money inflows. On March 30, the SAFE issued a circular on further enhancing foreign exchange operations, aiming to prevent inflows of illegal capital and ensure safety of foreign-related financial activities.

Source: China Textile Leader