Yuan Trades Near Strongest Level Since May on Stimulus Optimism

China’s yuan traded near the highest level since May on speculation the government will implement more stimulus measures to shore up growth in the world’s second-largest economy.

Domestic banks have been asked by regulators to increase lending to railways, roads and other construction projects to support growth, China Securities Journal reported today, citing an unidentified banker. The People’s Bank of China set the reference rate 0.03 percent stronger at 6.3338 per dollar, raising it for a second day. The local currency gained 0.2 percent this week and 0.3 percent since Aug. 31.

“The renminbi is back on a slowly appreciating path as policy makers carry out more stimulus measures,” said Daniel Chan, executive vice president at Glory Sky Global Markets Ltd. in Hong Kong. Still, “policy makers are in a dilemma in terms of currency policy as a weaker currency supports exporters yet may stoke inflation.”

The yuan traded at 6.3296 per dollar in Shanghai, compared with yesterday’s close of 6.3264, according to the China Foreign Exchange Trade System. It touched 6.3225 yesterday, the highest since May 22. The currency is allowed to trade as much as 1 percent on either side of the daily fixing.

China should take measures to prevent the economic conditions of 2010 when inflation reached 6.5 percent, Bank of China Ltd. Chairman Xiao Gang wrote in a commentary in the China Daily. Massive stimulus measures would be “detrimental” to sustainable economic growth, the official Xinhua News Agency wrote in an editorial yesterday.

Twelve-month non-deliverable forwards fell 0.12 percent today to 6.4240 per dollar in Hong Kong, a 1.5 percent discount to the spot rate in Shanghai, data compiled by Bloomberg show.

One-month implied volatility, a measure of exchange-rate swings used to price options, fell two basis points to 1.3 percent. In Hong Kong’s offshore market, the yuan declined 0.06 percent to 6.3340, snapping a five-day advance.

To contact the reporters on this story: Kyoungwha Kim in Singapore at kkim19@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.