China's currency, the yuan, will continue its ascent in value against the US dollar, and market watchers predict it won't be many days before one dollar trades less than 7 yuan, a new milestone.
The People's Bank of China, the central bank, set the central parity exchange rate at 7.0512 yuan against the greenback on Thursday, rising 136 basic points from Wednesday. The yuan has gained 3.3 percent in value since the beginning of 2008.
The majority of Chinese economists as well as policy-makers believe a strong yuan will help reduce the country's massive trade surplus, mop up excessive liquidity on the market, and curb domestic inflation, which rose to a 11-year high of 8.7 percent in February.
The recent accelerated appreciation of the yuan underscores the Chinese government's determination to rein in big domestic prices rises. Some analysts said Beijing has resorted to a two-pronged approach to fighting inflation: rapid yuan revaluation and rein in of liquidity on the money market.
On Tuesday the central bank ordered the reserve ratio that commercial banks are required to deposit in the central bank, be raised to 15.5 percent, effective on March 25. The measure is expected to recover 210 billion yuan from the credit market.
The yuan advanced 7 percent against the greenback in 2007, twice as fast as the previous year.
Others say the latest acceleration in the rise of the yuan might be the beginning of the country's efforts to narrow the trade imbalance, while better meeting domestic consumption demands with more imports.
However, the new challenges many Chinese exporters face include not only a more expensive local currency but also stringent environmental standards, rising wage levels, and weakening external demand.