The yuan strengthened beyond 6.4 per dollar for the first time in 17 years, supported by the Federal Reserve’s pledge to keep interest rates at a record low and signs China will use currency gains to help rein in inflation.
The currency rose 0.37 percent to close at 6.3945 in Shanghai, its biggest jump in nine months, according to the China Foreign Exchange Trade System. It touched 6.3895, the strongest level since the country unified official and market exchange rates at the end of 1993. The central bank’s reference rate was boosted 0.27 percent to 6.3991.
The International Monetary Fund said last month a stronger yuan would help stabilize the global economy, as well as aid government efforts to tame inflation and rebalance the nation’s growth toward domestic demand and away from exports. Data this week showed record overseas sales helped drive China’s trade surplus to a two-year high in July and consumer prices rose the most in three years.
“The inflation and trade data, together with the Fed’s policy to maintain extremely low interest rates, have fueled faster appreciation,” said Banny Lam, an economist at CCB International Securities in Hong Kong. “Strong economic growth, supported by the latest export figures, also provides investors with confidence to buy the yuan in these turbulent times.”
The yuan is the sole gainer this month among Asia’s 10 most-used currencies excluding the yen, having advanced 0.7 percent versus the dollar as a Standard & Poor’s downgrade of the U.S. credit rating and a rout in global equities prompted investors to pull back from riskier assets. The MSCI Emerging Markets Index of shares dropped 14 percent since July.
The Fed said on Aug. 9 it would maintain its record-low policy rate of zero to 0.25 percent at least through mid-2013 to revive a recovery it described as “considerably slower” than anticipated. The Federal Open Market Committee is “prepared to employ” additional tools to bolster the economy, said the monetary authority, which bought $2.3 trillion of debt since December 2008 during two rounds of so-called quantitative easing.
The U.S. will likely announce a third round of asset purchases, which would spur global inflation and boost the flow of “hot money” to China, the Beijing-based National Development and Reform Commission said yesterday. Kenneth Rogoff, a Harvard University economist, a day earlier also forecast the Fed will pump more dollars into the financial system.
Increased supply contributed to the dollar being the worst performer of 16 major global currencies since quantitative easing began. Australia’s dollar, the Swiss franc and Brazil’s real were the three best performers, climbing 44 percent or more versus the greenback since 2008. The yuan gained 6.7 percent.
In Hong Kong’s offshore market, the yuan gained 0.38 percent today to 6.3875 per dollar. Twelve-month non-deliverable forwards rose 0.96 percent to 6.2940, the biggest gain since June 2010, based on data compiled by Bloomberg. The premium to the onshore exchange rate widened to 1.6 percent from a two-year low of 0.4 percent on Aug. 9, the largest two-day jump since December 2008.
China may adjust its foreign-exchange policy to place less emphasis on the yuan’s value versus the dollar, the Economic Information Daily reported today, citing Pan Zhengyan, a researcher with the Shanghai Academy of Social Sciences.
The People’s Bank of China buys dollars to limit currency gains as capital flows into the country, a policy that’s made it the biggest foreign holder of Treasuries. Faster appreciation may stem purchases of U.S. government debt as the Fed’s loose monetary policy weighs on the dollar.
China’s $3.2 trillion of reserves are the world’s largest and compare with a combined $1.1 trillion for Brazil, India and Russia. Policy makers should urgently assess the risks from being the main investor in U.S. debt and accelerate diversification of the reserves, the Financial News reported today, citing Xia Bin, a central bank adviser.
“The strong rebound in the trade surplus, together with less willingness to accumulate more foreign-exchange reserves given the structural weakness of the U.S. dollar, are likely behind the recent rapid pace of yuan appreciation,” said Chang Jian, an economist at Barclays Capital in Hong Kong, who formerly worked for the World Bank. She predicts the currency will appreciate at a rate of 5 percent to 7 percent a year.
China’s overseas sales rose 20 percent from a year earlier to $175.1 billion in July, exceeding imports by $31.5 billion, the customs bureau reported yesterday. U.S. officials including Treasury Secretary Timothy F. Geithner and New York Senator Charles Schumer say China keeps the yuan undervalued to gain an unfair trade advantage.
After keeping the exchange rate stable for a decade, China allowed its currency to strengthen 21 percent from July 2005 to July 2008, including an initial, single-day gain of 2 percent. Appreciation was then halted for almost two years to help exporters weather a global recession and the currency has advanced 6.3 percent against the dollar since controls were loosened on June 19, 2010.
A return to a fixed exchange rate is unlikely as “the economy is more resilient than it was three years ago,” according to Liu Li-Gang, chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. Faster appreciation “may signal China’s intention to widen the yuan trading band,” he said.
The yuan is currently allowed to trade up to 0.5 percent on either side of the daily reference rate set by the central bank. The band was last expanded on May 18, 2007, from 0.3 percent.