China's Renminbi (RMB) broke the 7.5 mark to reach a new central parity rate of 7.4938 yuan to one US dollar on Wednesday, according to the Chinese Foreign Exchange Trading System.

 

The yuan, climbing 72 basis points to one dollar from Tuesday, rose a total 3,149 basis points from 7.8087 yuan on the last trading day of 2006.

 

Tan Yaling, an expert with the Bank of China, said a weakening dollar and calls from the United States and the Europe that China should allow the currency to appreciate more quickly were "short-term reasons" contributing to the recent rise in value.

 

"Speculation ignited by rising expectations of a stronger yuan also led to the continuous appreciation of the Chinese currency," she said.

 

The accumulative appreciation since July 21, 2005, when China abolished yuan's peg to the dollar, has exceeded eight percent.

 

However, Tan said the move to a more market-valued yuan should be made gradually.

 

"Currency appreciation was not the key solution to China's huge surplus, which should be solved through improvement of China's economic structure over the long term," she said.

 

Data from the General Administration of Customs shows the trade surplus for the first nine months reached US$185.7 billion exceeding the total trade surplus of US$177.47 billion for 2006.

 

Zhang Yansheng, director of the International Economic Research Institute under the National Development and Reform Commission, echoed Tan's opinion.

 

More than 55 percent of China's exports were made by foreign-funded enterprises, which were little affected by the appreciation as 70 to 90 percent of their materials and spare parts were purchased abroad, he said.

 

"Yuan appreciation has little impact on them since they use dollars in transaction settlements," he said.

 

"However, in the long term, we will see significant impacts since Chinese enterprises are still exporting a considerable amount," said Zhuang Jian, senior economist with Asian Development Bank Resident Mission.

 

The problem was that appreciation hurt domestic manufacturers too much, Zhuang said.

 

Wu Xiaoling, deputy governor of the central bank, said on October 20 during a visit to Washington that a sudden move to float the yuan would harm China, and ultimately the global economy.

 

The current mission for the Chinese government was not to control the currency value, but to adjust the economic structure. "The world should be more patient," said Wu.

 

Tan Yaling suggested that the central government should dispel expectations for yuan appreciation by expanding the trading band of the currency.

 

The People's Bank of China on May 21 further widened the floating band of yuan against dollar for daily spot trading on the inter-bank market from 0.3 percent to 0.5 percent.

 

At a conference of the People's Bank of China on Tuesday, the central bank said it would strengthen efforts in financial control and improve the valuation mechanism of the RMB exchange rate.

 

The yuan broke the 7.6 mark against the US dollar on July 3.

 

"After all, the 7.5 mark is just a psychological threshold and the appreciation is still mild and controllable," Zhuang said. "I don't expect any sudden moves."

 

However, China had to be aware of the influx of hot money during the continuous appreciation process, Zhuang warned.

 

The appreciation of yuan would increase asset values and so give a further boost to the stock market, said Cheng Weiqing, an analyst with the CITIC securities.

 

"It's hard to tell how much hot money has contributed to the surge of the stock and property markets," Zhuang said. "The influence might be minor and under well control right now."

 

"However, China needs to be cautious of the trend considering the excessive liquidity it already faces," he argued.

 

On Wednesday, the yuan lost 329 basis points from the previous trading day to reach a central parity rate of 10.6779 yuan against one euro.

 

Meanwhile, it climbed 28.5 points from 6.5585 on Tuesday to 6.53 yuan against 100 Japanese yen.

 

(Xinhua News Agency October 24, 2007)