China's Yuan Breaks $8.00 Key Level

China's currency, the yuan, strengthened May 15 to close below the psychologically important US $8.00 for the first time since a revaluation last year was supposed to herald in greater foreign exchange flexibility.

"There's definitely a trend for the yuan to rise in value in future," said Sun Lijian, an economist at Shanghai's Fudan University. "But it's not going to be as fast as many believe." There is only so much change the Chinese economy can absorb, and the banking sector in particular needs a stable environment to carry out much-needed reform, he argued.

The yuan ended at 7.9976 to the dollar on the local currency exchange after a parity rate of 7.9982 had been announced by the National Foreign Exchange Center early in the day.

It has been 12 years since the yuan -- under a different foreign exchange regime -- was last traded at this side of the $8.00 and the strengthening comes amid persistent calls for China to act on massive trade surpluses.

China officially allows market forces a say in determining the exchange rate, but only permits the yuan to fluctuate inside a 0.3% band around the dollar parity rate within each trading day.

The central bank is known to intervene routinely and heavily and the appreciation since July's revaluation has been at a snail's pace, disappointing those, chiefly the U.S., who had hoped for faster change.

"The timing is good," said Andy Xie, Hong Kong-based chief economist with Morgan Stanley. "It gives the impression that the action taken is not under the pressure of outsiders but just a normal action." He noted that the move on the yuan came after the release last week of a semi-annual U.S. Treasury report into global currency policies that stopped short of labeling China a currency manipulator.

Copyright Agence France-Presse, 2006

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