Yuan to gain 10% over next 12 months, say experts

The group said China would stem inflation and "buck the trend" in the region's fight against rising prices.

The yuan has been the best performer in the past three months among the 10 most-active currencies in Asia outside Japan, while seven have slumped against the dollar as food and oil costs have surged, fuelling inflation in the region.

China is different, because its central bank has tightened monetary policy earlier and more "aggressively", Goldman Sachs said.

China's inflation may slow towards 5-6 per cent later this year, Goldman's Hong Kong-based analysts Song Yu and Hong Liang wrote in a report published yesterday. The central bank has ordered banks to set aside more of their deposits as reserves five times this year, following 10 such moves last year. It also raised the benchmark interest rate six times last year.

China, which hosts the Olympics in August, will sustain 9-10 per-cent real growth in the coming years, provided it manages to contain inflation without "overly restraining its domestic demand", said Goldman Sachs analysts. The economy will not see a games-related boom-and-bust cycle, Yu and Liang said.

The yuan should strengthen to 6.30 against the dollar in 12 months, they said, from 6.9027 yesterday in Shanghai.

A slower pace of gains this quarter - 1.6 per cent compared with 4.2 per cent in the previous three months - is a "normal China-style stop before the go" approach, Liang said.

The South Korean won has been the worst performer in the region this year, with a 10.6-per-cent decline, with the Bank of Korea keeping interest rates unchanged last week. Policy-makers last adjusted borrowing costs last August, with a quarter-percentage point increase.

The Indian rupee and Philippine peso have slumped 8 per cent and 7 per cent, respectively.

The Philippines' central bank raised its interest rate on June 5 for the first time in more than two years, while the Reserve Bank of India raised its key overnight lending rate last Wednesday after leaving it unchanged for almost 15 months.

The Philippines' annual pace of inflation reached 9.6 per cent last month, the fastest in nine years, while India's inflation reached the quickest in seven years in the last week of the month. China's consumer price gains slowed to 7.7 per cent last month, from an 8.5-per-cent increase in April.