The Chinese currency yesterday strengthened to below 8 against the US dollar for the first time since last July's revaluation.

The Shanghai-based China Foreign Exchange Trade System reported that the daily benchmark, or the central parity rate for the US dollar, stood at 7.9982 yuan, falling below 8 yuan for the first time in 12 years.

The exchange rate was 8.0082 on Friday.

The currency traded at a low of 7.9972 per US dollar yesterday but ended at 8.003 at 5:30 pm, according to the system.

Traders said the market movements show the renminbi exchange rate has become more flexible despite international criticism to the contrary.

Finance expert Tan Yaling with Bank of China said the breaching of the 8-yuan barrier is "actually not a surprise. There were intense market expectations (for the dollar-yuan exchange rate) to fall below 8," she said.

"Although the central bank expects a stable exchange rate, the hopes (for yuan appreciation) of overseas and domestic institutions are high."

She said that it was a combination of China's robust economic growth, hefty bank lending and foreign exchange reserves - the largest in the world - that pushed the yuan higher.

A State Administration of Foreign Exchange official said yesterday that market forces should be given full play in determining the currency's value.

A Standard Chartered prediction is that the yuan would rise to 7.8 against the dollar by the end of this year; and Wang Zhihao, an economist at the bank, said he believes the yuan's value would stay on the upside in the short term.

Han Fuling, a finance research fellow with Central University of Finance and Economics, said he believes that the appreciation of the yuan would attract more overseas funds to China's stock market.

In a statement published yesterday, the People's Bank of China (PBOC), the central bank, pledged that the country would further improve the renminbi exchange rate regime.

It will try hard to bring down the trade surplus and achieve a trade balance. The authorities will also expand channels for outbound capital investment and gradually realize the full convertibility of the yuan under the capital account.

China last July unexpectedly reformed its decade-old foreign exchange rate mechanism, allowing the yuan to appreciate by 2 percent against the US dollar to 8.11 and pegging the yuan to a basket of currencies instead of the greenback alone.

But it still faces international pressure to let its currency appreciate further, given the mounting trade surplus with major trade partners like the US.

Some US lawmakers have been pushing for faster yuan gains to narrow their country's trade deficit with China.

But top Chinese officials reiterate that instead of a one-off revaluation, the exchange rate regime will be made more flexible gradually.

In a May 10 report to the Senate, the US Treasury Department decided against accusing China of tampering with its exchange rate, acknowledging the positive measures adopted by the Chinese Government to open up the financial market and its promises to allow the currency to trade more freely.

Foreign Ministry spokesman Liu Jianchao said on May 11 that the government would continue to push for the reform of further exchange rate flexibility.

Meanwhile, to cushion the impact of the ballooning trade surplus and foreign exchange reserves on the domestic economy, the central bank is likely to further tighten monetary policy to curb a rebound of loan and investment growth, said Gao Shanwen, chief economist at Everbright Securities.

(China Daily May 16, 2006)