Yuan hits record high against dollar
By Feng Jianmin |
August 12, 2011, Friday
|
Print Edition
Print Edition
CHINA'S yuan strengthened the most in 17 years yesterday to hit a new record high against the US dollar.
However, quicker appreciation is not likely in the longer term because of the pressure to sustain exports and battle an inflow of speculative capital, or hot money, from abroad, analysts said.
The yuan rose beyond 6.4 against the dollar as China's central bank set its central parity rate at 6.3991 yesterday, 0.27 percent stronger than that on Wednesday.
"The jump in the exchange rate was a bit surprising but it was well accepted by the market during trading," said Shi Weiyan, a senior trader at Bank of China.
The currency is allowed to trade up to 0.5 percent on either side of the official rate, and "only few bets were made above 6.40 against the US dollar," Shi said.
The pace of yuan appreciation is speeding up this week with official exchange rates rising 317 basic points in the four days since the Standard & Poor's downgrade of the US credit rating for the first time in 70 years.
The currency has appreciated 6.7 percent since last June, when the yuan's two-year de facto peg against the dollar ended.
In Hong Kong's offshore market, the yuan gained 0.28 percent to end at 6.3938.
"More investors are buying yuan due to the falling stock market and concern over slower economic growth and credibility in Europe and the US," said Shi. "Strong exports and elevated inflation in China are also backing the yuan's appreciation."
But he said that its appreciation would slow from its recent pace as the government needs to maintain exports and prevent an inflow of hot money. He expected the yuan to be around 6.3 against the dollar by the end of the year, a level widely agreed among economists.
Major economic data this week showed that record overseas sales helped drive China's trade surplus to a two-year high in July and consumer prices rose at their fastest pace in 37 months.
"The exchange rate is not a financial tool designed to battle inflation, but under the current global economic situation, the yuan's appreciation will help ease inflation, especially imported," said Ding Zhijie, dean of the School of Banking and Finance at the Beijing-based University of International Business and Economics.
Earlier this week, China's top economic planning agency warned of greater imported inflationary risks in the future against a high possibility that the US would introduce a third round of quantitative easing, or printing money, to repay debt and boost economic growth.
The policy may push up prices of international commodities and trigger an influx of hot money into China, the National Development and Reform Commission said.
Economists say the exchange rate will play a larger role in China's monetary policies against the turmoil in global financial markets.
"The space for more increases of reserve requirements for banks are declining, and the central bank will rely more heavily on the appreciation of yuan to maintain the intensity of its monetary policy," said Li Xunlei, chief economist with Guotai Junan Securities.
Sources said a draft of a five-year-plan for the financial sector will be submitted to the State Council for review, and the central bank has vowed to allow a more flexible yuan.
"The impact (of the new plan) will be more symbolic than actual," Shi said. "It will still take a long time for China's currency to open up."
However, quicker appreciation is not likely in the longer term because of the pressure to sustain exports and battle an inflow of speculative capital, or hot money, from abroad, analysts said.
The yuan rose beyond 6.4 against the dollar as China's central bank set its central parity rate at 6.3991 yesterday, 0.27 percent stronger than that on Wednesday.
"The jump in the exchange rate was a bit surprising but it was well accepted by the market during trading," said Shi Weiyan, a senior trader at Bank of China.
The currency is allowed to trade up to 0.5 percent on either side of the official rate, and "only few bets were made above 6.40 against the US dollar," Shi said.
The pace of yuan appreciation is speeding up this week with official exchange rates rising 317 basic points in the four days since the Standard & Poor's downgrade of the US credit rating for the first time in 70 years.
The currency has appreciated 6.7 percent since last June, when the yuan's two-year de facto peg against the dollar ended.
In Hong Kong's offshore market, the yuan gained 0.28 percent to end at 6.3938.
"More investors are buying yuan due to the falling stock market and concern over slower economic growth and credibility in Europe and the US," said Shi. "Strong exports and elevated inflation in China are also backing the yuan's appreciation."
But he said that its appreciation would slow from its recent pace as the government needs to maintain exports and prevent an inflow of hot money. He expected the yuan to be around 6.3 against the dollar by the end of the year, a level widely agreed among economists.
Major economic data this week showed that record overseas sales helped drive China's trade surplus to a two-year high in July and consumer prices rose at their fastest pace in 37 months.
"The exchange rate is not a financial tool designed to battle inflation, but under the current global economic situation, the yuan's appreciation will help ease inflation, especially imported," said Ding Zhijie, dean of the School of Banking and Finance at the Beijing-based University of International Business and Economics.
Earlier this week, China's top economic planning agency warned of greater imported inflationary risks in the future against a high possibility that the US would introduce a third round of quantitative easing, or printing money, to repay debt and boost economic growth.
The policy may push up prices of international commodities and trigger an influx of hot money into China, the National Development and Reform Commission said.
Economists say the exchange rate will play a larger role in China's monetary policies against the turmoil in global financial markets.
"The space for more increases of reserve requirements for banks are declining, and the central bank will rely more heavily on the appreciation of yuan to maintain the intensity of its monetary policy," said Li Xunlei, chief economist with Guotai Junan Securities.
Sources said a draft of a five-year-plan for the financial sector will be submitted to the State Council for review, and the central bank has vowed to allow a more flexible yuan.
"The impact (of the new plan) will be more symbolic than actual," Shi said. "It will still take a long time for China's currency to open up."
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