GOLDMAN Sachs yesterday raised its yuan forecast on expectations that China may slow buying of US dollars to cut the cost of holding record-high foreign-exchange reserves.

The yuan will strengthen 10 percent in 12 months to 6.3 per US dollar from a previous forecast of 6.38, Goldman Sachs economists Liang Hong and Eva Yi said in a report yesterday.

The Chinese currency may climb to 6.76 in three months and 6.60 in six months, the report said, raising its earlier estimates of 6.80 in three months and 6.55 in six months.

Since early April, the yuan appreciation rate has slowed to around 6.7-percent annualized rate in April and May, down from 17 percent in the first three months of the year. The slowdown triggers market speculation that the yuan appreciation pace may slow for the rest of the year which Goldman Sachs didn't agree with.

"The People's Bank of China needs to persistently buy large and rising amounts of the dollar to hold the yuan at its current level," the report said.

Holding record-high forex reserves, however, means adding pressure on domestic inflation.

China's forex reserves surged 40 percent to US$1.68 trillion in March from a year earlier. The reserves was reported to soar to US$1.76 trillion as of April 30 as the reserves rose US$74.5 billion that month, the most this year.

The huge forex inflows have boosted domestic credit growth, pumping an influx of capital in the banking system and leading the central bank to curb credit growth to ward off a credit-driven overheating.

The opportunity costs of holding the forex reserves relative to holding yuan assets have also risen rapidly, amounting to about US$15 billion per month, the report said.

The yuan has risen 19 percent since China de-pegged the currency from the greenback in July 2005. It has gained 5.3 percent this year.