China Signals More Yuan Moves Before Anniversary of Policy Shift

China Signals More Yuan Moves
Todays jump in the yuan and the statement from the currency regulator came the day before the sixth anniversary of the government scrapping a peg to the dollar. Photographer: Nelson Ching/Bloomberg

China said that it can allow more yuan moves without jeopardizing its foreign-exchange reserves after letting the currency rise today to a 17-year high against the dollar.

“The changes in the yuan’s exchange rate against the U.S. dollar causes changes in the paper value of the reserves when valued in yuan,” the State Administration of Foreign Exchange said today. “This is not a real loss and will not affect the real overseas purchasing power of the foreign-exchange reserves.”

Today’s jump in the yuan and the statement from the currency regulator came the day before the sixth anniversary of the government scrapping a peg to the dollar. Royal Bank of Canada said strength in exports and the need to tame inflation may encourage more gains.

“Concerns about the impact of yuan appreciation on foreign-exchange reserves is not going to be the determining factor” in the currency’s movements, said Brian Jackson, a senior strategist at RBC in Hong Kong. “More important is the need to get inflation under control and rebalancing the economy also points in the direction of a stronger currency.”

The Obama administration in May declined to brand China a currency manipulator while saying the world’s fastest-growing economy is making “insufficient” progress on letting the yuan appreciate.

Protect Investors’ Interests

The currency rose 0.06 percent to 6.4595 per dollar at 4:29 p.m. in Shanghai, according to the China Foreign Exchange Trade System. The currency reached 6.4557 earlier, the strongest level since China unified official and market exchange rates at the end of 1993. In Hong Kong’s offshore market, the yuan appreciated 0.11 percent to 6.4565.

Consumer prices in China, the world’s second-largest economy, climbed 6.4 percent in June from a year earlier, the fastest gain in three years.

The currency regulator, which manages the country’s $3.2 trillion of foreign-exchange reserves, called on the U.S. to protect the interests of investors in American debt.

“We hope the U.S. government takes concrete and responsible policy measures to strengthen the confidence of international financial markets, and respect and safeguard investors’ interest,” SAFE said in a statement on its website titled “Questions and Answers to Hot Issues Concerning Foreign-Exchange Reserves.”

‘Political Will’

The agency, which said it will issue its views in three parts, published a similar series of statements in July last year.

“China is maybe increasingly worried about its investments in U.S. and European debt given uncertainty in the market,” said Dariusz Kowalczyk, senior strategist at Credit Agricole CIB in Hong Kong. “Its calls may help the U.S. and Europe muster political will to put their fiscal houses in order.”

China’s foreign-exchange reserves climbed 30 percent at the end of June from a year earlier, boosted by the trade surplus, foreign direct investment and capital inflows betting on yuan appreciation.

The Asian nation remained the largest foreign holder of U.S. Treasuries at the end of May, with $1.16 trillion, and increased its holdings by $7.3 billion that month, according to the Department of the Treasury.

Diversifying Reserves

China’s leaders including Premier Wen Jiabao have said they are concerned about the value of the nation’s holdings of U.S. debt and that the country needs to diversify the investment of its reserves.

In its statement today, SAFE said its holdings of Treasuries will be “dynamically adjusted” according to market conditions and that increasing or reducing its holdings is “normal investment practice.”

While diversification will continue to be one of the principles for managing the nation’s reserves, the strategy won’t be based on short-term market movements, according to the statement.

Some economists in China have called on the government to use its foreign-exchange reserves to buy commodities. SAFE said today that any direct and large investments in goods such as gold and oil may push up market prices, harming consumption and economic development.

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