BEIJING - China's yuan traded near a 17-year high on speculation policymakers will allow the currency to strengthen to help curb inflation.

The currency may gain 6 percent this year as the government "recognizes the usefulness" of letting it appreciate to reduce the cost of imports, said David Cohen, head of Asian forecasting at Action Economics. The statistics bureau reported on Thursday that gross domestic product rose 9.8 percent from a year earlier in the three months through December, accelerating from a 9.6 percent pace the previous quarter.

"Everyone expects China to allow gradual appreciation," Singapore-based Cohen said. "China will proceed at its own pace," he said. The yuan traded at 6.5855 per dollar as of 10:29 am in Shanghai, little changed from 6.5833 at the end of last week, according to China Foreign Exchange Trade System. It reached 6.5812 on Friday, the strongest level since China unified the official and market exchange rates at the end of 1993.

Twelve-month non-deliverable forwards rose 0.1 percent to 6.4498, reflecting bets the currency will gain 2.1 percent in a year.

The People's Bank of China set the yuan's daily fixing at 6.5883 against the greenback on Monday, little changed from Friday's level of 6.5886. The yuan is allowed to trade by up to 0.5 percent on either side of the so-called central parity rate.

The central bank raised its benchmark one-year deposit rate twice in the last quarter, lifting it by half a percentage point to 2.75 percent. This month it ordered major banks to set aside more funds as reserves for the fourth time since October, helping limit credit expansion as policymakers tackle inflation.

The consumer price index climbed 4.6 percent from a year earlier in December, following a 5.1 percent advance the previous month that was the biggest since July 2008.

Bloomberg News

(China Daily 01/25/2011 page17)