The renminbi yesterday strengthened to below 7.90 against the US dollar, partially because of growing speculation that the government will soon expand the band within which the currency is allowed to fluctuate.

*US Senators drop bid for punitive tariffs on China

The daily benchmark, or the central parity rate for the US dollar, was set at 7.8998 yuan yesterday, the first time that the currency crossed the psychological barrier of 7.90 since last July's revaluation, according to the Shanghai-based China Foreign Exchange Trade System.

China discarded the renminbi's decade-old direct peg to the US dollar in July last year, switching to a mechanism that sets the exchange rate on a basket of world currencies such as the greenback, the euro and the Korean won.

Under the new regime, the yuan is allowed to fluctuate 0.3 per cent per day either way of the reference rate, which is set by the central bank.

The renminbi appreciated to 7.9982 yuan against the US dollar on May 15, the first time that the currency fell below 8 in 12 years. Since then, the appreciation has gained pace, leading to growing calls for expanding the daily trading band.

"The recent appreciation was largely triggered by the growing speculation that the authorities are likely to widen the daily trading band," said Li Yongsen, an economist with Renmin University of China.

"However, the fundamental reasons behind the currency appreciation still remain the same: pressure from the foreign exchange reserves and mounting trade surplus," the economist said.

1

2