China's currency, the Renminbi (RMB), rose 123 basis points against the U.S. dollar on Wednesday, the largest appreciation in one day since a revaluation reform came into effect in July last year.

The appreciation followed a sharp 203 basis points fall on Monday. The radical drop was unexpected after a year of slow appreciation of the RMB, shocking many dealers.

Last Thursday the RMB daily benchmark value rose to a new high of 7.9688 yuan for one U.S. dollar after the central bank issued its quarterly monetary report.

Analysts say that sharp fluctuations in the RMB value make yuan trading risky.

Overall, the RMB has inched upward since July last year when its value was raised by two percent and linked to a basket of foreign currencies, scrapping the decade-old peg to the U.S. dollar.

The yuan's average price against the U.S. dollar has remained stable for a long time, with daily fluctuations limited to 100 basis points.

The recent 203-basis-point drop and subsequent 123-point rise have created huge risks for Chinese commercial banks, whose dealers could lose millions of dollars overnight in the new scenario.

Song Guoxiang, an analyst with China Galaxy Securities Company, attributed the sharp fluctuations to the country's willingness to make exchange rates more flexible.

"Although this will create risks, it will also help energize the market," he said.

Song attributed big ups and downs to market forces rather than central bank interference.

Recent fluctuations in the value of the U.S. dollar provided the basis for the RMB float. The U.S. Labor Department said the producer price index (PPI) rose a mere 0.1 percent in July from June, lower than expectations. This fueled the appreciation of the RMB.

The sharp fluctuation in the RMB's value focuses attention on the exchange rate market, and signals that the currency can float in either direction.

Speculators betting on an RMB appreciation will become more cautious trading yuan, analysts said.

The yuan has risen by 3.6 percent against the U.S. dollar since last July's reform.

It is restricted to a 0.3 percent band movement against the greenback per day. Ha Jiming, chief economist at the China International Finance Corporation Limited, said the government-set range is likely to widen to 1 percent by the end of the year.

The People's Bank of China, China's central bank, promised in a recent monetary report that "market forces would play a bigger role in determining the yuan's value, and that the currency would gradually be made more flexible."
 
Editor: Yan