The yuan is expected to reach fresh highs as few choices are left to curb inflation, economists said yesterday.

The People's Bank of China posted the yuan's central parity rate at 7.1460 against the greenback yesterday, the highest since China depegged the currency with the US dollar in July 2005.

This year, the rate rose 23 times versus 11 falls as the central bank fixed the central parity based on average quotes from 10-plus market makers.

"The combination of rampant inflation and continued strong exports has emboldened policy makers (for the yuan's faster appreciation)," said Tang Sumei, an economist for Moody's Economy.com.

Authorities are speeding up the pace of yuan appreciation and increasing currency flexibility to address the threat of inflation.

The latest economic indicators showed that controlling inflation is still the priority for China's economic agenda, and the exchange rate will remain a major weapon.

China's consumer price index, the main gauge of inflation, rose 7.1 percent in January at the fastest pace in more than 11 years. Factory-gate inflation rose 6.1 percent in the opening month, the fastest rate in more than three years.

China's January exports grew an faster-then-expected 26.7 percent, indicated that China's trade pattern has not been affected sizably by slowing external demand and the quickened pace of yuan appreciation in recent months.

Yi Gang, vice governor of the central bank, said on Sunday the PBOC will maintain tight monetary policy despite internal and external uncertainties.

China raised the interest rate six times last year and pushed the reserve requirement rates to a two-decade high to curb liquidity, but with little success, Moody's said.

"A strong yuan would ease inflation pressures by lowering the cost of imports, stimulating domestic supply, and offsetting some shortages on the mainland," Tang said.

Shen Minggao, a Citigroup economist, said yuan appreciation will likely be used as another effective instrument to contain inflation besides interest rate increases and reserve requirement growth.

Lu Zhengwei, an Industrial Bank analyst, expects the yuan to gain 10 percent against the greenback this year. Standard Chartered Bank expects the yuan to gain nine percent.

(Shanghai Daily, February 26, 2008)