Yuan options more expensive as officials pledge no increase

The dollar peg has pushed the currency 8.9 percent higher against the weakening euro in the past three months, increasing the price of China's imports in Europe, its largest trading partner, said Warren Hyland, who helps Schroder Investment Management Ltd. oversee US$200 billion in assets from London.

Exporters also are being hit by rising wages. China's Jiangsu province, the third-largest export region, increased minimum wages by about 13 percent in February to ease a labor shortage. Shanghai, the No. 2 exporter, will do likewise on April 1.

The central bank is reducing its focus on protecting growth to contain inflation. Regulators have ordered banks to set aside more cash as reserves and to curb lending after the economy grew 10.7 percent in the fourth quarter, the most in two years. Housing prices climbed at the fastest pace in 21 months.

Anti-inflation efforts are being undermined as central bank sales of yuan for dollars to maintain the peg flood the economy with cash. China's accumulation of foreign reserves grew by US$1 million per minute in the second half of 2009 to US$2.4 trillion, a sum approaching the size of the UK economy, central bank data show. Money supply, as measured by M1, rose a record 39 percent in January, triple the average rate in 2005, according to the data.

Consumer prices probably climbed 2.5 percent in February from a year earlier, up from 1.5 percent in January in the biggest increase since October 2008, according to the median estimate from 23 economists. The inflation rate was 1.8 percent in July 2005, when the government loosened its grip on the currency by letting it appreciate 2.1 percent in one day after maintaining a peg of about 8.3 for a decade. China's statistics bureau will issue its next inflation report on March 11.

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