UPDATE 2-Yuan firms past 7.0 vs dlr first time since 1993

(Rewrites with market close)

By Lu Jianxin

SHANGHAI, April 10 (Reuters) - The yuan strengthened past 7.00 to the U.S. dollar on Thursday for the first time in more than a decade, underlining China's growing economic power and its increasing use of the currency in the fight against inflation.

The weakness of the dollar in global markets was partly responsible for the rise. But analysts said soaring consumer prices and diplomatic pressure by major trading partners were also prompting China's central bank to let the yuan rise.

"China is now under both international and domestic pressure for the yuan to appreciate at a fast pace," said Liu Dongliang, currency analyst at China Merchants Bank in Shenzhen.

The Chinese currency CNY=CFXS opened at 6.9920 against the dollar and traded narrowly before ending the day at 6.9916, up moderately from Wednesday's close of 7.0017.

It traded on the stronger side of 7.00 for the first time since China devalued the yuan to 8.7 from 5.8 at the start of 1994, creating a modern foreign exchange market.

The Chinese central bank tightly controls the market through regulations and indirect intervention, and has limited the pace of yuan rise to support China's exports.

But since July 2005, when the yuan was revalued and its peg to the dollar scrapped, its rise against the dollar has gained pace, accelerating from 2.6 percent in 2005 to 3.4 percent in 2006 and 6.9 percent in 2007. So far this year, it is up 4.5 percent.

While the acceleration is partly due to the dollar's global decline, the United States and the European Union have been pressing China hard to let the yuan climb even faster in order to cut the huge Chinese trade surplus.

DIPLOMATIC PRESSURE

U.S. Treasury Secretary Henry Paulson, visiting Beijing last week, praised China for letting the yuan rise more quickly over the last several months, calling for the trend to continue.

So far, China has not so let the yuan gain against the currencies of many other big trading partners. For example it has fallen 11 percent against the euro EURCNY=CFXS since July 2005.

But analysts believe this will change over the coming year because domestic economic pressures now favour appreciation.

Last November, the central bank declared for the first time that it would use the exchange rate actively to fight inflation, which hit an 11-year high of 8.7 percent in February this year.

That suggests China is gradually shifting toward managing its currency in the same way as developed economies, using its rise to cool the economy when it overheats and allowing it to soften to stimulate growth during slowdowns, analysts say.

"There now appears to be a clear understanding among the top leadership that sticking to a devalued currency is not good for the Chinese economy, including inflation," said a dealer at a top Chinese state-owned bank in Beijing. He declined to be named because he was not authorised to speak publicly to media.

Yuan appreciation has become especially important to restrain inflation since the start of this year as the central bank has partially loosened domestic monetary policy, flooding the money market with funds to ease financing problems at small companies.

ANNUAL APPRECIATION

Some foreign investment banks speculate that to prevent inflows into China of funds betting on continuous yuan appreciation, authorities may resort to another large, immediate revaluation of the currency.

But Chinese leaders have publicly ruled out such a step, and the onshore foreign exchange market believes it is highly unlikely because of the instability it could cause.

Instead, dealers think yuan appreciation will slow in the second half of this year as inflation eases and the central bank guards the economy against a slowdown in U.S. and global growth.

While the strong yuan helps Chinese firms such as airlines and oil importers to cut their overseas procurement costs, it is already hurting lower-end exporters such as clothing makers.

Reflecting expectations for yuan appreciation to slow later in 2008, one-year appreciation against the dollar implied by offshore forwards CNY1YNDFOR= has dropped in recent weeks, to 11.2 percent on Thursday from a record 13.8 percent in mid-March.

Onshore dealers generally predict yuan gains of between 8.5 and 10 percent for all of this year.

The yuan's strength is gradually making it an attractive store of value around the region. Yuan bank accounts in Hong Kong are expanding rapidly, and Chinese businessmen and tourists informally exchange the yuan around southeast Asia.

But for the yuan to become a major traded currency on the scale of the dollar or euro, China will need to remove capital controls and allow much greater market volatility -- steps which remain many years away, analysts believe. (Reporting by Lu Jianxin; Editing by Andrew Torchia and Tomasz Janowski)