Yuan Advances Most in a Week on U.S. Downgrade, Record Fixing

Yuan Jumps Most Since April on U.S. Downgrade, Record Fixing
The yuan rose 0.22 percent to 6.4263 per dollar in Shanghai, according to the China Foreign Exchange Trade System. Photographer: Nelson Ching/Bloomberg

China’s yuan strengthened the most in a week, touching a 17-year high, as a Standard & Poor’s downgrade of the U.S. debt rating fueled speculation China will rein in dollar purchases used to limit appreciation.

The People’s Bank of China raised its reference rate for the currency by the most since November after S&P cut America’s top credit rating by one level to AA+ on Aug. 5. The U.S. should avoid letting its currency weaken or taking fresh monetary steps that may worsen the dollar’s depreciation, Xinhua News Agency said yesterday in a commentary. China is the biggest foreign owner of Treasuries, holding $1.16 trillion of the securities as of May, U.S. Treasury Department data show.

The yuan rose 0.07 percent to close at 6.4360 per dollar as of 4:30 p.m. in Shanghai, paring earlier gain of as much as 0.24 percent, according to the China Foreign Exchange Trade System. The currency touched 6.4250, the strongest level since the country unified official and market exchange rates at the end of 1993.

“Investors may have chosen to lock-in gains as they are still wary of taking risks after the U.S. credit downgrade,” said Carlos Cheung, a Hong Kong-based foreign-exchange dealer at Bank of Communications Ltd. “From the fixing, you can see the government doesn’t hesitate to appreciate the yuan.”

The People’s Bank of China set its daily fixing 0.23 percent higher at a record 6.4305 per dollar. The currency is allowed to trade up to 0.5 percent on either side of the official rate.

Foreign Reserves

In Hong Kong’s offshore market, the yuan appreciated 0.14 percent to 6.4265, based on data compiled by Bloomberg. Twelve-month non-deliverable forwards appreciated 0.16 percent to 6.3782, a 0.9 percent premium to the onshore spot rate.

Premier Wen Jiabao is promoting the use of yuan in international trade and finance to reduce the country’s reliance on the dollar. China’s $3.2 trillion of foreign-exchange reserves are the world’s largest. Brazil, India and Russia have combined holdings of about $1.1 trillion.

China must stop buying dollars and allow the exchange rate to be decided by market forces “as soon as possible,” Yu Yongding, a former central bank adviser, wrote in a commentary in the Financial Times on Aug. 5. The nation’s accumulation of dollar-denominated assets is vulnerable to devaluation of the U.S. currency, he wrote.

“China may accept faster yuan appreciation as the downside of holding U.S. dollar assets is greater than that of slower export growth,” said Dariusz Kowalczyk, a Hong Kong-based senior strategist at Credit Agricole SA.

Inflation Risk

The nation’s reserves have exceeded a “reasonable” level and issuance of yuan for dollars flowing into the country is putting pressure on efforts to control the money supply, People’s Bank of China Governor Zhou Xiaochuan said April 18. “The build-up could cause big risks,” he said, without elaborating.

“The U.S. rating cut could be an opportunity for China to step up efforts to increase the appeal of the yuan,” said Banny Lam, a Hong Kong-based economist at CCB International Securities. “Yuan appreciation can also help to ease imported prices as inflation remains at a high level.”

The yuan has risen 2.4 percent against the dollar this year and will appreciate 2.2 percent to 6.30 per dollar by the end of December, according to the median estimate of 30 analysts surveyed by Bloomberg.

China’s inflation held at a three-year high of 6.4 percent in July, according to the median estimate of economists surveyed by Bloomberg before government data is released tomorrow. Premier Wen Jiabao said at the end of June that there would be “difficulties” keeping the rate within the government’s 4 percent ceiling this year after it exceeded that level every month in the first half.

“Inflation is the No. 1 concern,” said Pu Yonghao, Hong Kong-based chief investment strategist for Asia-Pacific at UBS Wealth Management in a Bloomberg Television interview. “Allowing the exchange rate to appreciate will help to contain inflation.”

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