The strengthening of China's currency, yuan, has made an epoch mark on Thursday, as the yuan against the US dollar exchange rate officially broke the 7:1 threshold.
The People's Bank of China, the central bank, set the medium parity trading rate of the yuan against the greenback at 6.9920:1, the first time the rate surpassed the 7:1 benchmark, since China's central government phased out its old exchange regime in July 2005.
A bank teller counts the stack of Chinese yuan and US dollars at a bank in Shanghai. [Agencies]
The ever-rising value of the yuan against the dollar is a reflection of the world monetary markets, analysts said. Since the beginning of the year, the value of both euro and Japanese yen has gained 8.5 per cent against the US dollar on the New York market, as the US Federal Reserve reduced major interest rates several times to prevent the world's largest economy from slipping into a recession.
Chinese economists say another reason for the growing gain of the yuan against the dollar is Chinese central bankers are seriously worried about the domestic inflation, which rose to an 11-year-high of 8.7 per cent in February. China's statistics authorities are expected to announce the inflation number for March next week. Many estimated it to hover above 7 per cent.
China abolished a fixed yuan exchange rate pegging the US dollar in July 2005.
Since then, the yuan's value has been determined by the market performance of a basket of major foreign currencies, including the dollar, the euro, the Japanese yen and Korean won.
The recent quickening appreciation of the yuan seemingly underscores the Chinese government's determination to rein in domestic prices rises, which has triggered rising complaints from the public. Some said that Beijing has resorted to two-pronged approaches to fight inflation: rapid yuan revaluation and rein-in of liquidity on the money market.
US Secretary of Treasury, Henry Paulson, told chinadaily.com.cn in an interview last week in Beijing that the Bush administration has taken notice of the rapid rise of the yuan value, a step that has helped facilitate US exports to China, one of the world's major growing consumption markets.
And, quite a few Chinese economists and policy-makers believe that a stronger yuan will also help reduce China's massive trade surplus, and mop up excessive liquidity on the market.
Others say that 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 with more imports. However, others have cautioned that too precipitous rise of the yuan could pose a grave challenge to China’s exports and does not bode well for the job market.
The yuan has gained 4.5 per cent against the greenback since the beginning of 2008. The yuan advanced 7 percent against the greenback in 2007, twice as fast as in 2006.