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The yuan yesterday advanced to less than 7.97 against the US dollar, showing signs of quickening appreciation.

 

The daily benchmark, or the central parity rate for the US dollar, was set at 7.9699 yesterday, the strongest reference rate for daily trading since the revaluation in July last year, according to the Shanghai-based China Foreign Exchange Trade System.

 

The yuan could move 0.3 per cent per day either way of the reference rate.

 

The currency slipped to a low of 7.9671 per US dollar but closed at 7.9689 at 5:30 pm yesterday.

 

The yuan has so far gained an accumulated 3.7 per cent against the greenback since revaluation.

 

"Clearly, the yuan's appreciation pace is accelerating, which is in line with the market situation as pressure from both the foreign exchange reserves and trade surplus is mounting," said Yi Xianrong, a research fellow at the Chinese Academy of Social Sciences (CASS).

 

The currency appreciated to 7.9982 against the US dollar on May 15, the first time it had fallen below 8 yuan in 12 years.

 

And since then, the appreciation has quickened.

 

It took 49 trading days for the yuan to strengthen below 7.99 against the US dollar, while it only took five trading days to see it below 7.98. It took six days before the yuan advanced to 7.97.

 

The central bank said last week that "it will take a basket of comprehensive measures, which include spurring consumption and imports, and expanding the foreign exchange rate flexibility, to improve the international balance of payments," an announcement interpreted by some as implying the bank is seriously considering expanding the exchange rate band.

 

But some experts say the currency appreciation is not a fundamental way to resolve the trade imbalance.

 

"Only by changing the current export-led economic growth model into one that is driven by domestic consumption can the current excessive trade surplus growth and trade imbalance be resolved," Cao Honghui, an economist at CASS, said.

 

Fuelled by the swelling trade surplus and foreign investment inflow, China's foreign exchange reserve surged to US$941.1 billion by the end of June.

 

The mounting foreign exchange reserves, which are already the world's largest, are also driving a growth in money supply and credit.

 

(China Daily August 8, 2006)