China’s Yuan Rises Most Since March as Fed Steps Up Stimulus

China’s yuan strengthened the most since March, halting a five-day drop, after the Federal Reserve said yesterday it will step up asset purchases that boost the supply of dollars and spur demand for emerging-market assets.

Industrial production and retail sales in Asia’s largest economy rose last month at the fastest pace since March, while export growth slowed, data showed in the past week. The Fed said it will buy $45 billion of Treasury securities a month from January to support the U.S. economy, adding to existing monthly purchases of $40 billion of mortgage debt.

The Fed’s decision “should be supportive of risk-on sentiment,” said Suan Teck Kin, an economist at United Overseas Bank Ltd. in Singapore. “I am still looking for a bit of strengthening for the yuan toward the end of the year. Overall, the economic situation is on track for improvement, although the trade numbers have been quite disappointing.”

The yuan advanced 0.3 percent to close at 6.2329 per dollar in Shanghai, according to the China Foreign Exchange Trade System. That is 0.9 percent stronger than the People’s Bank of China’s reference rate, which was weakened by 0.01 percent today to 6.2887. The yuan is allowed to fluctuate a maximum 1 percent on either side of the fixing and tested the upper limit of its trading band on most days since the end of October, reaching a 19-year high of 6.2223 on Nov. 27.

‘Significantly Undervalued’

The Chinese currency climbed 1.2 percent against the dollar this year following a 4.7 percent advance in 2011. It is expected to strengthen 1.3 percent by the end of 2013, according to the median estimate of 26 analysts in a Bloomberg News survey.

The Treasury Department said on Nov. 27 that China isn’t a currency manipulator under U.S. law, though the yuan “remains significantly undervalued” and needs to rise further. The Asian nation has built up $3.29 trillion in foreign-exchange reserves, partly through intervention in currency markets.

One-month implied volatility for the yuan, a measure of expected moves in exchange rates used to price options, increased 21 basis points, or 0.21 percentage point, to 1.85 percent.

In Hong Kong’s offshore market, the yuan rose 0.1 percent to 6.2219 per dollar as of 5:07 p.m. local time, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards gained 0.05 percent to 6.3105, a 1.2 percent discount to the spot rate in Shanghai.

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net

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