(chinadaily.com.cn)
Updated: 2008-03-26 11:22

China's currency, the yuan, rose steeply to 7.0252 against the US dollar on Wednesday, as more Chinese economy watchers see the accelerating gains of the currency has helped the country combat inflation, and lower its massive foreign currency reserve build-up.

Analysts say it won't be many days before one US dollar trades less than 7 yuan, a new milestone since China scraped a fixed exchange rate system in July 2005.

The People's Bank of China, the central bank, set the central parity trading rate at 7.0252 yuan against the greenback, from Tuesday's 7.0436. The yuan has gained nearly 3.5 percent in value since the beginning of 2008.

Economists and policy-makers believe that a stronger yuan will help reduce the country's massive trade surplus, mop up excessive liquidity on the market, and effectively curb domestic inflation, which rose to a 11-year high of 8.7 percent in February.

The recent quickening appreciation of the yuan seemingly underscores the Chinese government's determination to rein in big domestic prices rises. Some analysts said that Beijing has resorted to two-pronged approaches to fight inflation: rapid yuan revaluation and rein-in of liquidity on the money market.

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 from March 25. The measure is expected to recover 210 billion yuan from the market.

The yuan advanced 7 percent against the greenback in 2007, twice as fast as in 2006.

Others say that the latest acceleration in the rise of the yuan might be the beginning of China's efforts to narrow the trade imbalance while better meeting domestic consumption with more imports.