The central parity rate of the yuan yesterday breached the psychological mark of 7 against the US dollar, exacerbating the woes of exporters and manufacturers.
The central bank set the rate at 6.992 yuan to the greenback, the first time the currency has broken through 7 since the yuan's peg to the US currency was scrapped in July, 2005.
"It will have some psychological impact, but won't be a big shock," said Dong Yuping, senior economist with the Institute of Finance and Banking affiliated to the Chinese Academy of Social Sciences (CASS). "It has been widely expected given the recent pick-up in the pace of appreciation."
The yuan has risen about 4.3 percent against the dollar so far this year on the back of a 6.9 percent rise last year. It has risen by about 18 percent since July 2005.
The yuan, however, has not appreciated much against the trade weighted currency basket, although it is trading stronger than those currencies.
Apart from the sliding dollar, UBS Investment Research said in a report that factors contributing to the recent acceleration in yuan's appreciation include decreasing "hot money" inflows since last October, which eased pressure on policymakers and enabled them to allow the yuan to appreciate faster.
Dong said it is also possible that policymakers have allowed faster appreciation to ease inflation, which jumped 7.1 and 8.7 percent respectively in January and February.
Another factor is China's strong export performance - shipments have grown at about 20 percent year on year in real terms, which has eased officials' concerns about the impact of currency appreciation, the UBS said.
The yuan appreciation, however, would slow, said Dong.
"I think the dollar may stabilize and gradually rebound by the end of next year," he said, adding that the yuan may gradually rise to about 6 to the dollar and stabilize in the next two years.
UBS said the potential comeback of speculative capital inflows would keep the authorities from allowing the yuan appreciation to be too fast.
Moreover, China's trade surplus has been flat or falling for 18 months and this trend will continue through next year, which means the underlying pressure on the currency is moderating, the UBS report said.
The yuan's relentless rise has been pinching many exporters, who have had to raise prices, shorten contract periods or shift to domestic sales.
"Many of our clients have complained about our frequent price adjustments and we dare not sign long-term deals for fear of unexpected losses due to the yuan's further appreciation," said Liao Yu, a senior manager of Guangdong-based Chigo Air Conditioner Co Ltd.
For Ningbo-based Yunhuan Electronics Group Co Ltd, the currency appreciation has left the company with no alternative but to raise its prices by 2.5 percent - and purchasers have since cut down on orders. "Only some long-term customers have agreed to share currency-incurred losses with us," Shen Xiangjun, the company's sales manager, said.
Fearing weakening external demand, many companies have shifted to China's domestic market.
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