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By Dong Zhixin (chinadaily.com.cn)
Updated: 2008-01-23 11:11

Chinese stocks rebounded in volatile trading on Wednesday to end two days of sharp losses, and the yuan reached a new high against the greenback, after a hefty US interest rate cut.

Before trading started, the People's Bank of China set the yuan central parity rate at 7.2350 to the US dollar, the highest level since China ended its peg to the dollar in July 2005.

People smoke in front of an electronic board at a stock exchange in Shanghai January 22, 2008. [Agencies]

In equity markets, the benchmark Shanghai Composite Index rose as much as 2.7 percent within minutes of the opening of trading, as investors hunted for bargains after the gauge lost 7.2 percent on Tuesday and 5 percent on Monday.

However, the rebound did not last long, as panic selling resumed, sending the index down 0.59 percent to 4,533.06 points at the end of the morning session.

Bargin-seekers returned again in the afternoon and helped push the index up 3.14 percent to 4,703.04 at the close. 

Stock investors' confidence came partly from the Federal Reserve of the United States who slashed the federal funds rate by 0.75 percent, the biggest cut in two decades, to avert a recession.

The drastic move eased fears for a while that the housing market slump and the sub-prime crisis might drag the world’s largest economy into recession, thus affecting global economic growth. Such concerns were believed to be a key reason behind a worldwide meltdown in the equity market.

In response to the Fed's move, the Dow Jones Industrial Average recovered from a 465-point loss to close the day off 128 points. The Standard & Poor's 500 index fell 1.11 percent, while the Nasdaq composite index lost 2.04 percent.

That indicated investors remain wary of the prospect of the economy, which may force the Fed to cut the rate further. In fact, the US central bank did make such hints when announcing the rate cut.

Any further cuts will add to the pressure on the yuan to rise in value. The Chinese currency has appreciated more than 12 percent against the dollar since July 2005.

Chinese analysts expected an 8 to 10 percent rise in the yuan's value this year, as Western countries are demanding for faster appreciation.

Adding to the pressure, China may have to resort to further interest rate hikes after 6 increases in 2007 to prevent the economy from overheating and to tame inflation.

At the end of last year, China's policymakers shifted the country's monetary policy to "tight" from "prudent" faced with a runaway economy and rising inflation.

The world's fourth major economy expanded 11.5 percent in the first three quarters and inflation accelerated to 6.9 percent in November, the highest in 11 years.

Key economic figures for the whole of 2007 will be released Thursday. However, figures for December will be postponed till February, including the consumer price index, earlier reports said.