Shanghai will closely monitor the yuan's appreciation as a more valuable currency can benefit certain sectors of the economy while hurting others.

A more valuable yuan can help curb inflation, boost imports and encourage outbound investment, said Zhou Bo, head of the Shanghai Development and Reform Commission, in a panel report to the Shanghai People's Congress.

When inflation is high, a more valuable yuan can make imports cheaper and in turn tame inflation.

Consumer prices in the city increased a mild 2.2 percent in the first half although economists expect a further rise in the second half due to uncertainties about agricultural products. The ongoing World Expo may also lead to price increases.

On the other hand, the appreciation of the yuan also squeezes profit margins among labor-intensive exports such as textiles and other light industry, Zhou said in the report.

The light industry's average profit margin is around 3.5 percent in the city. Any currency appreciation above that can essentially eliminate profits in the sector.

Currency appreciation will also lure speculative capital, or so-called hot money, to the city as people bet on a rising yuan by buying real estate or stocks. Large inflows of hot money can disturb the local economy.

On June 19, the central government pledged to make the yuan more flexible and let the market have more say in its pricing mechanism. The yuan had been flat around 6.83 against the US dollar since the outbreak of the global financial crisis. The yuan yesterday ended at 6.78 to the greenback.

The yuan has gained 22 percent since China dropped a decade-long peg to the US dollar in July 2005.