China's central bank let the yuan appreciate slightly Tuesday night to 7.1452 yuan to the dollar from 7.1580 yuan, China's Xinhua News Agency announced Wednesday. The report also provided a hint regarding the pace of future currency appreciation.

"We will further improve monetary policy controls, continue to use quantitative measures, widen usage of price-related policy tools and increase innovation in monetary policy measures,'' the central bank said in the report, without elaborating, Bloomberg News reported.

Zhou Xiaochuan, head of the People's Bank of China, China's central bank, has said repeatedly in recent months that the yuan rate would gradually reach a "balanced" level and help bring equilibrium to the balance of payments.

At issue: The yuan

China is facing pressure on a number of fronts to appreciate its currency. Both the United States and Europe would like China, which maintains the yuan's rate in an artificially low trading band, to float its currency or at least let it come close to reflecting a fair-value rate in the years ahead. China keeps the yuan artificially low to reduce the cost of goods exported, which boosts exports sales. Both the U.S. and Europe say that rate gives China an unnatural competitive advantage in trade. China counters that it needs a low-valued yuan to increase wealth and protect young sectors of its developing economy.

Many economist believe the yuan would appreciate to 5.00-4.50 yuan to the dollar, or perhaps even more, if allowed to float freely, i.e. be determined by market forces.

Second, China is also trying to cool its economy to control retail inflation, which is running at 7-8% annual rate. With the yuan's rate fixed to the dollar, when international companies increase the cost of their goods and services to compensate for the lower dollar, China experiences those price increases, as well, increasing inflation. Concerning monetary policy, China raised interest rates six times in 2007 and also increased bank reserve requirements to lower inflation.

In addition, China is facing international pressure to cool its economy to reduce pressure on commodity prices, which have surged amid a global economic expansion. The price of oil, coal, copper, wood, wheat, soybeans, and corn, among other commodities, have risen during the past three years -- in large part due to the China-led emerging markets boom. Economists and analysts are now beginning to debate whether economic growth in emerging markets could outstrip the world's ability to supply affordable commodities and raw materials.

Inflation deemed key

Economist David H. Wang said China won't let trade surpluses influence its currency policy decision, but rather will increase the yuan's value to help contain domestic inflation.

"The Chinese Government is beginning to see that the fixed yuan does have a serious economic downside for China," Wang told BloggingStocks Wednesday. "They now realize that higher interest rates alone won't cool inflation because a lot of it is imported via the dollar's depreciation."

Wang said he expects China to let the yuan appreciate to 6.70-6.60 yuan to the dollar by the end of 2008, and to 6.10-6.00 yuan by the end of 2009.

"The currency situation represents a delicate balancing act for Chinese officials. On the one hand, they know that strong growth and export revenue are keys to the economy's development and rising living standards," Wang said. "On the other hand, they're beginning to see that current growth rates are not sustainable, in terms of containing inflation, and keeping commodity costs reasonable, which is why they're likely to appreciate the yuan quicker."