The Chinese yuan cracked the 7.3 mark against the US dollar yesterday and raced to a new post-revaluation high with a tightened monetary policy.

The currency ended the day at 7.2934 at the China Foreign Exchange Trade System in Shanghai yesterday, further from its central parity rate of 7.2996, also a record high for the central parity.

The People's Bank of China set the central parity on average weighted quotes from 10-plus market makers.

"The new high of the yuan maintained last year's strong appreciation," said a foreign exchange dealer with a stock bank in Shanghai.

The yuan has picked up its rate of appreciation since October. The currency gained 2.3 percent in the last two months of 2007, leading last year's whole year appreciation to 6.87 percent, far above the forecasts of three to five percent made by some economists. The 2007 growth almost doubled the increase in 2006.

The currency has gained a total of 13.3 percent since China dropped its decade-long link to the greenback and shifted to a basket of currencies including the Korean won and the Japanese yen in July 2005.

"The appreciation of the yuan is widely expected to be realized through daily trading by setting the new central parity high rather than a one-off appreciation," the dealer said.

Yesterday was the first trading day of the yuan this year with the market closed on Monday and Tuesday.

The central bank will further control liquidity and improve the currency exchange mechanism this year to adjust overall demand and improve the balance of international payments, Zhou Xiaochuan, the central bank governor, said in a New Year message posted on the central bank's Website on December 29.

"Zhou's words suggest an expectation of a faster appreciation of the yuan," said a foreign exchange trader from one of the major banks in Shanghai. "Inflation is one of the main drivers for the appreciation of yuan - plus a weak dollar."

China's inflation, the rising trade surplus and a weak US dollar are expected to add to the quicker appreciation of the yuan this year.

The consumer price index, the main gauge of inflation, rose 6.9 percent in November, the highest for more than a decade.

The central bank said earlier that the forex rate would be one method of controlling inflation.

China's trade surplus rose 52.2 percent in the first 11 months of 2007 to US$238.1 billion, leading to a forex reserve of US$1.46 trillion, according to the General Administration of Customs.

(Shanghai Daily January 3, 2008)