China's currency, the yuan, breached the psychologically important barrier of eight yuan to the U.S. dollar on Monday, the central bank announced amid strong market expectations.

According to a People's Bank of China announcement, the yuan's daily benchmark, or central parity, rose to 7.9982 against the dollar. Generally, the currency has been inching upward since its July 21 revaluation and today's close was its highest. On Friday, the rate was 8.0082.

The central parity is based on a weighted average of enquired prices from all market makers, including major domestic banks, before the market opens each business day.

China raised the value of yuan by 2 percent and started linking it to a basket of foreign currencies last July, scrapping its decade-old peg to the U.S. dollar.

The yuan, limited to moving 0.3 percent above or below each day's parity rate against the U.S. dollar, has now risen more than 3 percent since July.

But the United States said the rise was too small to make a big dent in its huge trade deficits with China. American manufactures contend that the yuan is undervalued by as much as 40 percent, making U.S. goods more expensive in China and Chinese products cheaper in the United States.

In an interview with Xinhua, finance expert Tan Yaling with the Bank of China said the breaching of the eight-yuan phenomenon is "actually not a surprise. Eight is a very sensitive point. There were intense market expectations (for the dollar-yuan exchange rate) to fall below 8. It did not materialize last week," she said.

"Although the central bank expects a stable exchange rate, the hopes of overseas and domestic institutions are too high."

She said China's robust economic growth, hefty bank lending and the world's largest foreign exchange reserves combined to push the yuan higher. However, the economy's serious structural problems, featuring overheated investment, strong exports and lackluster consumer spending, do not support a currency appreciation.

Meanwhile, Tan said the yuan's rise would probably aggravate China's deflationary risks; the country's consumer price index, the leading measure of inflation, has seen a continuous decline in recent years, dropping to 1.2 percent in the first quarter.

She urged quantitative analysis, based on both Western economic theories and actual scenarios in China, to establish a reasonable exchange rate.

A State Administration of Foreign Exchange official, who asked to be unidentified, echoed Tan's remarks, saying that the yuan's depreciation below eight against the dollar is "in line with his foresight."

"But the rate might climb back above eight with changes of market factors," he told Xinhua.

Speaking of future yuan reforms, the official said market forces should be given full play in determining the currency's value.

A Standard Chartered prediction is that the yuan would rise to 7.8 against the dollar by the end of this year. Wang Zhihao, an economist at the bank, said he believes the yuan's value would stay on the upside in the short run.

On Thursday, Chinese Foreign Ministry Spokesman Liu Jianchao said China appreciates the newly-released U.S. current report that didn't list China as a currency manipulator.

He said the report, released by the U.S. Treasury Department on May 10, took note of China's efforts in boosting domestic demands, establishing a more flexible foreign exchange mechanism and financial reforms.

Encouraged by the report and the U.S. Federal Reserve decision to lift the benchmark short-term interest rate by a quarter-percentage point -- which strengthened the dollar -- the Chinese currency failed to gain much ground last week.

Han Fuling, a finance research fellow with Central University of Finance and Economics, said he believes that the appreciation of the yuan will bring more overseas funds into China's stock market, which continued last week's strong growth on Monday with major index closing at a new two-year high of 1,664.09 points, a rise of 3.82 percent from Friday's close.

China share prices have soared in recent weeks on institutional buying and improved confidence and optimism over a resumption of share offerings after a year-long break that saw new reforms put in place.

Overseas speculators, betting on a yuan rise, were buying heavily yuan-denominated assets including stocks in recent years. However, Han said fresh money inflows are "good news" for the stock market which have remained bearish for years.

Source: Xinhua