Yuan Gains to 17-Year High as China Sets Reference Rate Higher

China’s yuan strengthened to a 17- year high as the central bank set the currency’s reference rate at the strongest level in nearly six years.

The People’s Bank of China set the rate 0.04 percent stronger at 6.4921 per dollar, the highest level since July 2005. China’s inflation may accelerate to 6 percent, according to George Magnus, a senior economic adviser at UBS AG in London. Consumer prices rose 5.3 percent in April, above the government’s target of a maximum of 4 percent this year.

“The fixing is back to its appreciation path to reflect the domestic inflation concern,” said Edmond Law, deputy head of foreign exchange at BWC Capital Markets in Hong Kong. “We may see further tightening in China and that makes the yuan spot stronger.”

The yuan advanced 0.03 percent to 6.4915 per dollar as of the close at 4:30 p.m. in Shanghai, according to the China Foreign Exchange Trade System. The currency touched 6.4858 earlier, the strongest level since 1993. The yuan isn’t allowed to move more than 0.5 percent either side of the central bank’s daily fixing. In Hong Kong’s offshore market, the yuan gained 0.1 percent to 6.4910.

Twelve-month non-deliverable forwards strengthened 0.13 percent to 6.3775 per dollar as of 4:34 p.m. in Hong Kong, reflecting a 1.8 percent premium over the spot rate in Shanghai, according to data compiled by Bloomberg.

The fair value of the yuan, which is “significantly undervalued” against the dollar, may be between 3.5 and 6 versus the dollar, Magnus said at the Bloomberg China Conference in London yesterday. There is “virtually no chance” of a one- off appreciation in the currency, he said.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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