By Christina Soon
May 17 (Bloomberg) -- The yuan had its highest close since the central bank ended a dollar link in July 2005 on speculation the central bank will allow faster appreciation to help narrow China's record trade surplus.
Chinese Premier Wen Jiabao yesterday said his country will gradually boost exchange-rate flexibility and take measures to balance trade flows. A stronger yuan increases export prices and cuts import costs. Vice Premier Wu Yi will meet U.S. Treasury Henry Paulson on May 22-24 in Washington.
``We've seen pretty strong numbers all these months and we're approaching the next strategic dialogue,'' said Huang Yiping, chief Asia economist at Citigroup Inc. in Hong Kong. ``The risks of overheating, over-investment and too much surplus and liquidity all point in one direction. The currency definitely needs to go stronger.''
The yuan rose 0.15 percent to 7.6707 against the dollar at 5:30 p.m. in Shanghai, its highest close since the end of the fixed exchange rate, according to the China Foreign Exchange Trade System. The central bank has allowed the currency to rise 7.9 percent since China dropped the link in 2005.
China's trade surplus ballooned 63 percent in April from a year ago to $16.9 billion, the General Administration of Customs said on May 11. Foreign-exchange reserves rose by a record $136 billion in the first quarter to $1.2 trillion.
Export revenue is flooding the financial market with cash and making it difficult for the government to cool economic growth, which exceeded 10 percent for the fifth quarter in the first three months.
``China will gradually increase the flexibility of its currency regime,'' Wen said at the African Development Bank's annual general meeting in Shanghai, without being more specific. The economy still faces the risk of excessive liquidity, he said.
Some U.S. lawmakers say China keeps an undervalued yuan to benefit Chinese exporters, causing a widening trade gap between the two nations. The U.S. Commerce Department on March 30 levied duties on imports of coated paper to compensate for the Asian nation's subsidies to its exporters.
The yuan may rise 7.5 percent this year, Huang said. The forecast compares with the 3.5 percent gain to 7.41 by the end of this year, according to the median of 25 contributors in a Bloomberg survey.
``The central bank has allowed faster appreciation and they'll probably continue to do that,'' Huang said.
Government bonds fell after a report showed investment growth expanded more than expected. The yield on the benchmark five-year bond rose 7 basis points, or 0.07 percentage point, to close at 3.33 percent in Shanghai, according to the China interbank bond market. The price of the 3.18 percent security due April 2012 fell 0.33, or 3.3 yuan per 1,000 yuan face amount, to 99.33. Bond yields move inversely to prices.
China's spending on factories and real estate grew 25.5 percent in the first four months of the year from a year earlier, a government report showed today, beating the 25.3 percent median estimate of 19 economists surveyed by Bloomberg News.
``It was strong growth and may support the case for the central bank to keep raising interest rates,'' which will hurt bonds, said Li Huiyong, an economist at Shenyin Wanguo Research and Consulting Co. in Shanghai.
The central bank on March 18 raised rates for the third time in 11 months, increasing the one-year lending rate by 0.27 percentage point to 6.39 percent. The deposit rate was raised by the same amount to 2.79 percent.