China's yuan rose sharply against the US dollar on Thursday as the central bank set the medium price at 7.2775 against the greenback, a stunning rise of 221 basic points from a day ago.
The yuan, also called renminbi (people's money), gained as much as 0.37 percent from the close Wednesday to 7.2725 as of 11:30 am Thursday, according to the China Foreign Exchange Trade System in Shanghai.
The appreciation of the yuan is also made possible as the market weakness of the dollar never ends. A report on Wednesday showed manufacturing in the US shrank the most in December in five years, increasing bets the US Federal Reserve will cut interest rates again in January to avoid a recession.
The dollar fell against the euro on Wednesday as the market awaited publication of the minutes from the US central bank's last interest rate meeting for a lead on the direction of American monetary policy. In midday European trade, the euro rose to 1.4658 dollars from 1.4585 dollars.
Analysts predict a faster pace of yuan appreciation in the coming days. Last week, a report by the New York Times quoted Yao Jingyuan, chief economist with the National Bureau of Statistics, as saying Chinese economists were debating more appreciation moves.
"It is certain that the yuan will appreciate -- the time frame and magnitude of the adjustment is difficult to confirm at the current time. We are busy studying this issue right now," Yao was quoted as saying.
The slow pace of yuan appreciation may do China more harm than good, said Yu Yongding, a researcher with the Chinese Academy of Social Sciences, in a story published in the China Securities Journal.
"A too-slow appreciation would allow foreign investors to buy Chinese assets cheaply and easily," said Yu.
The yuan rose 0.9 percent during the last week of 2007 against the US dollar, which is more than any one-week increase since the People's Bank of China stopped pegging its currency to the dollar on July 21, 2005. Ever since, the yuan has risen more than 10 percent in value against the greenback.
Economists and market pundits say the Chinese government has seen rising domestic inflation as a positive climate for a stronger yuan. It is believed that a rising yuan could also help the country cut cost in importing fossil fuel like oil and raw materials like iron ore and copper.
However, opposing voices in the labor market said they were concerned that faster appreciation of the yuan would hurt domestic employment, and hurt exports as a stronger currency cuts into profit margins. That worry was offset as Chinese exports rose 22.8 percent in November compared with 2006 levels.
Meanwhile, the Wall Street skidded lower Wednesday after a weaker-than-expected reading on the manufacturing sector and a spike in oil prices to $100 a barrel triggered concerns of a further slowdown in the overall US economy.
The Dow Jones fell 220.86, or 1.67 percent, to 13,043.96, and the Nasdaq composite index fell 42.65, or 1.61 percent, to 2,609.63.