The yuan dropped by almost touching the 0.5-percent daily trading band against the US dollar yesterday for three straight days.

The yuan's recent declining movement stoked market speculation that China is allowing the currency to depreciate to boost exports.

The yuan ended at 6.8822 against the greenback on the China Foreign Exchange Trade System in Shanghai yesterday, down 0.47 percent from the People's Bank of China's central parity rate of 6.8502.

The central bank set the yuan at about 6.85 against the greenback on Monday, a sharp move which surprised the market after the Chinese currency has been leveling off at about 6.83 against the US dollar for a month.

The market translated the weaker central parity rate as the central government favoring a weakening yuan so as to help the nation's exports. The central bank set the central parity based on the weighted average quotes from 10-strong market makers.

Lu Zhengwei, an Industrial Bank chief economist, said it's wise to allow more flexibility in the yuan, both upward and downward, in pursuit of a free float trading regime in the long run.

"In the past, we have only been familiar with the one-sided appreciation of the yuan since China reformed its foreign currency regime in 2005," said Lu. "Experience has shown that after flexibility has been widened a currency can successfully transfer to a free-float currency. We definitely can't always look at an upward move as full flexibility. We need downward moves, or depreciation at some stage, to complete the picture of more flexibility."

The Chinese currency is appreciating quickly against other major currencies in recent months though it's moving flat against the US dollar. The yuan's real effective exchange rate is at a record high since 1995, pinching China's exporters. The yuan rose about 7 percent versus the US dollar this year through mid-July, before staying flat. The yuan has gained 20 percent since China delinked it from the greenback in July 2005.

The economic slowdown in the country and the tough times faced by its exporters are leading to more calls for the yuan to depreciate.

The Chinese central bank gave no explanation for the yuan's movement, which comes ahead of a visit by US Treasury Secretary Henry Paulson for the fifth-round of Sino-US economic talks that starts today.

(Shanghai Daily December 4, 2008)