A CHINESE financial expert expects the yuan's appreciation against the US dollar to slow this year, despite substantial gains at the Shanghai-based National Foreign Exchange Centre in the past few days. Liu Guangcan, of the State Administration of Exchange Control (SAEC), told Xinhua (the New China News Agency) the yuan would continue to appreciate this year, but at a slower pace, because the growth in demand for foreign currencies was expected to outstrip that of supply in coming months. In Shanghai, the yuan closed at 8.3443 against the dollar yesterday, down 205 basis points, to post another consecutive low. The yuan began its swift rise against the dollar on April 27, as the central People's Bank of China was said to have scaled down its purchase of foreign currency in the domestic market because of soaring inflation. Since then, the yuan has gained almost 0.9 per cent against the dollar. Purchase of the dollar has the effect of unleashing fresh money supply in the market, fuelling prices to rise. On January 1 last year, China dropped its two-tier exchange system and introduced a 'managed floating' exchange system. Last year, the yuan rose against the dollar from 8.7 to close at 8.4462 at the end of the year, an increase of three per cent. Mr Liu attributed the yuan's rise last year to a sound macroeconomic environment, the central bank's stringent monetary policy, and successful reforms in the country's foreign trade system, which helped reverse chronic trade deficits and produced a hefty surplus. He said the influx of a record US$33 billion in direct foreign investment was another factor behind the yuan's appreciation. In the first quarter, China posted foreign reserves of $58 billion, an increase of more than $6 billion for the quarter. Mr Liu said the major forces which drove up the yuan last year continued to apply. 'However, the pace will be slower,' he said, noting that demand for foreign exchange increased noticeably in the first quarter of this year while increase in supply was moderate. He said the yuan went up 198 points from January to March, compared with an average of more than 200 points a month last year. He expected demand for foreign exchange would continue to grow this year while the country's foreign exchange reserves would increase slower than before because of an expected drop in direct foreign investment and a slowdown in foreign trade. Economists expect the stronger yuan will erode the competitiveness of China's exports. They attributed the substantial growth in exports last year to the yuan's effective depreciation of 33 per cent with the new single-rate system. 'The gap between supply and demand in foreign exchange will keep narrowing for the remainder of the year, allowing the yuan to go up slower,' Mr Liu said.