The value of the Renminbi (RMB) against the U.S. dollar hit a new high on Wednesday, with the central parity rate at 7.8394 yuan to one dollar, breaking the 7.84 mark.

The RMB value has risen in value by 3.45 percent since July 21, 2005, when the Chinese government launched the reform of the exchange rate system to allow the yuan to float against the U.S. dollar within a daily 0.3 percent band around the official central parity rate.

The exchange rate was set at about 8.28 yuan per U.S. dollar before the reform.

The latest rise followed previous records on Nov. 9 when the central parity rate hit 7.8697, breaking the 7.87 mark, Nov. 23 when it was 7.8596, breaking the 7.86 mark and Nov. 27 when it was 7.8402, breaking the 7.85 mark.

Analysts said the recent appreciation of the yuan was mainly due to the continuing slump of the U.S. dollar and expectations of lower interest rates in the United States.

Investors' pessimism about the outlook for the U.S. economy in the fourth quarter -- with unemployment higher than expected and the U.S. government cutting its forecast for this year's economic growth rate from 3.6 percent to 3.1 percent -- have increased pressure on the dollar.

The U.S. dollar's drop could push up the yuan, said Tan Yaling, finance expert with the Bank of China.

Since the reform of China's exchange rate system, the yuan has become sensitive to the international foreign exchange market.

China's financial departments and institutions are strong enough to accept more financial reforms, including more flexible exchange rates and more market-oriented interest rates, the Financial News quoted Zhou Xiaochuan, governor of the People's Bank of China, as saying at the Group 20 meeting on Nov. 18.

The newspaper said Zhou's remarks may have been interpreted as meaning that the floating band exchange rate would widen, leading to a further appreciation of the yuan.

China's soaring foreign exchange reserves and the rocketing trade surplus are also factors prodding the yuan to new highs.

However, Tan ascribed the latest appreciation of the yuan to the irrational market, saying that speculative arbitrage played an important role.

The yuan may bounce back to 7.85 and even 7.86 when the U.S. dollar regains its strength, said Tan, adding that fluctuations have increased since the beginning of the year.

Tan advocates a gradual reform of the exchange rate system by the Chinese government.

If exercised too early, and in the absence of a sound financial system, greater flexibility could harm the economy, warned Wu Xiaoling, deputy governor of the People's Bank of China, at a recent forum.

The Chinese government must define the limits of flexibility, and firms should be given adequate time to adapt to flexible interest and exchange rates, said Wu.

Source: Xinhua