| Yuan likely to climb gradually in long term |
SHANGHAI, May 26 -- The yuan experienced a quicker rise this week after the central bank tightened money supply and widened the daily trading band of the currency, and analysts predicted it's likely to keep a gradual rise in the long term.
The central parity, based on average weighted quotes from 10-plus commercial banks serving as market makers, has smashed five records this week, according to the China Foreign Exchange Trade System.
"Such frequent record breaking rode on the back of the new tightening measures, wider trading band and pressures from the US during the Sino-US Strategic Economic Dialogue," said Ning Dongli, an analyst at Orient Securities Co.
China last week widened the daily trading fluctuation of the yuan to 0.5 percent from the original 0.3 percent, along with another interest rate rise and an increase in bank reserve requirement to cut money supply.
The wider daily trading band is believed to be a symbolic gesture China made to the United States as it boosted the flexibility of its currency before the second round of the dialogue which started on Tuesday.
"The series of moves may trigger an acceleration in the yuan's appreciation in the coming sessions," said Ning.
The central parity rate, an indicator of market views on the yuan's movements, was fixed at 7.6523 against the US dollar yesterday, the fifth straight record high. The Chinese currency hit a record high of 7.6519 before settling at 7.6523 against the greenback on Thursday. The yuan has gained 7.6 percent since China abandoned the decade-long fixed exchange rate of 8.28 to the US dollar on July 21, 2005.
Analysts forecast that the currency will settle below 7.5 by the end of this year.
"In the long run, we expect the yuan to pursue gains in small steps as a rapid appreciation could choke the economy by dampening overseas sales (exports)," said Jin Di, a Shanghai-based trader at the Bank of China Ltd.
A stronger yuan will reduce the competitiveness of Chinese products in the global market thus cutting exports, choking the export-driven economy and raising unemployment.
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