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Weakening dollar adds price pressure

By Xin Zhiming (China Daily)
Updated: 2008-06-19 11:20

A weakening dollar has contributed to China's inflationary pressure by pushing up commodity prices around the world, said the country's central bank governor.

Chinese policymakers need to learn from the lessons of US subprime woes, said Zhou Xiaochuan, governor of the People's Bank of China, also a member of the Chinese delegation attending the two-day session of the Sino-US Strategic Economic Dialogue (SED) in Maryland, US.

The dialogue, headed by the US Treasury Secretary Henry Paulson and Chinese Vice-Premier Wang Qishan, ended yesterday.

"Emerging economies are feeling the pinch (of rising prices)," he said at a news briefing in Annapolis, Maryland. "A weakening dollar may push up prices of commodities such as crude oil," which are major imports of China, he said.

The price of crude oil has on one occasion topped $135 a barrel in recent trading sessions.

Raw-material prices have also been hovering at high levels since last year, putting pressure on China's factory-gate prices, which would in turn pass onto the consumer inflation zone.

In May, China's producer price index, which gauges factory-gate prices, rose 8.2 percent, the highest in more than three years, feeding concerns that although consumer inflation eased to 7.7 percent in May, down from 8.5 percent the previous month, it may rebound in the coming months.

The central bank yesterday set the mid-point of the yuan's exchange rate at 6.8823 against the dollar, marking a new historical high since China revalued the yuan by 2.1 percent to 8.11 per dollar in July, 2005. It has appreciated a further 17.84 percent since then.

The yuan has regained momentum of fast appreciation while it is strengthening in the non-deliverable forwards market.

Analysts said the yuan's strengthening would reduce pressure on China's "imported inflation", or inflation incurred by imports, but the effect has proved to be limited. Worse, it has started to push some domestic export-oriented enterprises to the wall.

The appreciation momentum of the yuan may not slow until the Olympic Games in August, said Liu Dongliang, currency analyst of the Shenzhen-based China Merchants Bank. "The post-Olympic trend is not clear yet."

Zhou also said China will learn from the US financial woes triggered by its subprime problems.

Sovereign wealth fund

Finance Minister Xie Xuren, who was also attending the SED session, said the country's overseas investment through its $200 billion sovereign wealth fund does not pose a threat to financial markets.

Xie said that the fund is not aimed at short-term speculation but long-term investments that should help the overall economy.

As the US financial market is bogged down by the subprime crisis, the capital injection from investment by the world's major sovereign wealth funds has helped stabilize the market, but some US politicians fear that such investment will pose a threat to US financial security.