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China’s Yuan Advances on Stronger Fixing, Yuan Investment Trial

China’s yuan strengthened for a second day after policy makers published rules to allow more overseas funds to be invested in the domestic market and raised the currency’s daily reference rate.

Qualified institutional investors will be allowed to use yuan funds raised in Hong Kong in the domestic capital market on a trial basis, according to a statement dated Dec. 16 on the China Securities Regulatory Commission’s Website. The program was “an important step in making the yuan an international currency” as it offered more channels to invest, Yim Fung, chief executive officer of Guotai Junan International Holdings Ltd. in Hong Kong said in a phone interview today. The People’s Bank of China set its daily reference rate 0.08 percent stronger at 6.3303 per dollar, the highest level in a week.

“The fixing shows the PBOC’s determination to continue with a gradual yuan appreciation and internationalization, undeterred by the depreciation bets in the offshore market,” said Kenix Lai, a Hong Kong-based currency analyst at Bank of East Asia Ltd.

The yuan gained 0.17 percent to close at 6.3378 per dollar in Shanghai, according to China Foreign Exchange Trade System. It touched 6.3294 on Dec. 16, the strongest level since China unified official and market exchange rates at the end of 1993. The currency is allowed to trade as much as 0.5 percent on either side of the central bank’s fixing. In Hong Kong’s offshore market, the yuan rose 0.16 percent to 6.3630 today.

Yuan Forwards

The increasing flexibility of the yuan means China is on its way to a market-based exchange rate, China Business News reported today, citing Guan Tao, head of the State Administration of Foreign Exchange’s balance of payments department.

Yuan forwards weakened, along with other Asian currencies, after the official Korean Central News Agency reported North Korean dictator Kim Jong Il had died and Fitch Ratings put the credit ratings of seven European countries on review for a possible downgrade.

Twelve-month non-deliverable forwards fell 0.06 percent to 6.4085, after gaining 0.7 percent on Dec. 16. The contracts traded at a 1.1 percent discount to the onshore spot rate.

Fitch said on Dec. 16 it was re-assessing rankings for France, Belgium, Spain, Slovenia, Italy, Ireland and Cyprus. A “comprehensive” solution to Europe’s crisis is “technically and politically beyond reach,” it said.

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