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China's currency, the yuan, reached a 17-year high Wednesday after the country's trade surplus grew unexpectedly last month, reaching its highest level in more than two years.

Under perennial international pressure to strengthen its currency, and now facing conflicting policy demands in the form of increasing inflation at home and the risk of economic slowdown abroad, the People's Bank of China set the yuan-dollar central parity rate at 6.4167, the biggest single increase since November. The yuan reached 6.4120 before closing at 6.4181 to the dollar – the former its strongest level since China unified exchange rates in 1993.

The move came as China's trade surplus was shown to have reached $31.5-billion in July, a number that surpassed most expectations, fuelled by stronger than expected exports to Europe and Japan. According to Chinese customs administration data, both imports and exports were up last month.

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The numbers suggest the global economy is stronger than some have said – somewhat reassuring at a time when stock markets are volatile and doom and gloom is prevalent, following S&P's downgrade of the U.S. credit rating last week. Domestic demand is also thought to be helping take the edge off the slowing of foreign demand for Chinese goods.

"Both exports and imports came in stronger than expected as the trade surplus widened. This should provide Beijing more confidence for China's growth outlook as external uncertainties continue rising," wrote Qu Hongbin, co-head of Asian economics research at HSBC, in a note to clients. "China's export-oriented manufacturers remain highly competitive and resilient despite the [yuan's] ongoing appreciation, higher wage and raw material costs, and tight credit conditions."

Exports rose 20.4 per cent in July year over year, up from 17.9 per cent in June, while imports increased 22.9 per cent in July, up from 19.3 per cent in June.

"The numbers are quite good. This shows China's economy is okay because import growth of 22.9 per cent suggests Chinese demand is quite stable and China's health is okay," Ting Lu, a Hong Kong-based economist with Merrill Lynch, told Reuters. "In the past couple of months, the U.S. economy has been turning down. It's been actually quite weak, but China's export growth has held out."

Economists still suggest Chinese exports will slow this year; U.S. demand for Chinese goods dipped slightly in July even as Europe and Japan helped push the value of their exports to a record high of $175.1-billion.

The latest trade data will inevitably renew calls to let the yuan appreciate more quickly. China is generally thought to keep its currency low relative to the U.S. dollar to make its goods cheaper for the world to buy, safeguarding its economy's heavy reliance on exports, though Chinese officials have always denied the accusation.

This strengthening of the yuan was triggered in part by the U.S. Federal Reserve's pledge to keep interest rates low, which will put more pressure on the U.S. dollar. Observers frequently point out that many of the yuan's gains in recent months have been on the back of a weakening U.S. dollar, leaving it still a long way to go in terms of real appreciation.

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The move should also help slow China's continued inflation – which in July reached a three-year high of 6.5 per cent – in lieu of the interest rate hikes which have been the preferred tool this year.

A mild statement by Chinese premier Wen Jiabao to a state-controlled television network late on Tuesday has been taken as indication that China's policy makers are rethinking their economic priorities, and possibly shifting away from controlling inflation as the top priority.

"We should properly handle the balance between managing inflationary pressures, maintaining economic growth and adjusting the economic structure," Mr. Wen told CCTV.

A planned visit to China by U.S. Vice President Joe Biden next week is also thought to have added some impetus for the new peg.

"Despite the less-certain global outlook, today's data also still suggests that Beijing has scope to allow further currency appreciation to aid its efforts to contain inflation, in line with our forecast for a move in USD/CNY to around 6.25 by end-2011," RBC Emerging Markets Research Group wrote to clients.

Special to The Globe and Mail

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