China's official exchange rate weakened significantly on Tuesday, the central bank announced, defying a gain the day before that helped break through the psychologically important 8 yuan per US dollar level.

 

The dollar, measured by the central parity rate announced by the People's Bank of China (PBoC) before the market opens each business day, bounced back to 8.0150 yuan. The yuan depreciated by 168 basis points, the biggest day-on-day decline since a revaluation reform last July.

 

In an interview with Xinhua, finance expert Tan Yaling with Bank of China said, "There will definitely be a return following speculative activities in the market. Essentially, the (currency) price ups and downs are very natural."

 

She said she believes the breaching of eight yuan per dollar level was largely brought by market expectations and fluctuations of major foreign currencies, instead of China's actual economic needs.

 

Only gradual, small adjustments of the yuan's value can benefit China's healthy development, she acknowledged. Tan cited China, still a developing economy, is facing industrial structural imbalances, low finance efficiency and other problems, though its gross domestic product was growing rapidly.

 

It has already drawn attention in the market; on the over-the-counter market, the dollar had rebounded to 8.0012 yuan by late Monday afternoon.

 

The PBC announces the parity rate each trading day by calculating the weighted average of prices given by 13 market makers, including major commercial banks, excluding highest and lowest offers.

 

And then, the yuan is allowed to move 0.3 percent above or below the parity rate against the U.S. dollar.

 

China raised the value of yuan by 2 percent to 8.11 per US dollar and started linking it to a basket of currencies on July 21, scrapping the yuan's peg to the dollar for more than a decade. The yuan has since risen more than 3 percent.

 

But the United States said the rise was too small to make a big dent in its huge trade deficits with China. American manufacturers contend that the yuan is undervalued by as much as 40 percent, making US goods more expensive in China and Chinese products cheaper in the United States.

 

As market forces are playing a more important role in determining the value of yuan, also called renminbi or RMB, financial regulators have been reminding domestic enterprises of exchange rate risks when they do business with foreign firms.

 

China is boosting measures to relax foreign exchange controls and introducing hedging tools to help enterprises cope with financial risks.

 

(Xinhua News Agency May 17, 2006)