Yuan Completes Weekly Advance as RQFII Expands; Forwards Retreat

China’s yuan had its biggest weekly gain in a month as the government expanded a quota for foreigners to invest in domestic securities.

Yuan positions at Chinese banks accumulated from sales of foreign exchange climbed 21.6 billion yuan ($3.47 billion) in October, the central bank said today. China will increase the Renminbi Qualified Foreign Institutional Investor Program by 200 billion yuan from 70 billion yuan, Guo Shuqing, chairman of the securities regulator, said Nov. 11. The Communist Party unveiled its new leaders yesterday, with Xi Jinping replacing Hu Jintao as party secretary.

“China is encouraging inflows of capital as a way to stimulate its economy, which will keep the yuan at a strong level,” said Daniel Chan, executive vice president at Glory Sky Global Markets Ltd. in Hong Kong. “The key uncertainty now is who will be in charge of economic policies in China’s new leadership and how aggressive they are in terms of reforms.”

The yuan rose 0.15 percent this week to close at 6.2356 per dollar in Shanghai, according to the China Foreign Exchange Trade System. It fell 0.04 percent today after the People’s Bank of China weakened the reference rate 0.06 percent to 6.2945.

The currency touched 6.2252 on Nov. 14, the strongest level since the government unified the official and market exchange rates at the end of 1993. The spot rate is allowed to fluctuate by as much as 1 percent from the central bank’s fixing and touched the upper limit of its trading band for a ninth day yesterday.

Risk Aversion

Forward contracts on the yuan dropped today, tracking other Asian currencies, as concern budget deficits in the U.S. and Greece will delay a global economic recovery prompted investors to pull money from riskier assets. The Dollar Index climbed for a second day.

“The yuan’s offshore market is more sensitive to risk-aversion among investors across the region,” said Chan. “There are still concerns about problems in the U.S. and Europe so demand for the dollar has been strengthening.”

In Hong Kong’s offshore market, the yuan fell 0.22 percent today to 6.2410 per dollar, according to data compiled by Bloomberg. The currency snapped a 15-week advance, the longest since offshore trading started in the second half of 2010. Twelve-month non-deliverable forwards dropped 0.17 percent today to 6.3465, a 1.7 percent discount to the onshore spot rate.

One-month implied volatility for the yuan, a measure of exchange-rate swings used to price options, climbed eight basis points, or 0.08 percentage point, to 1.68 percent this week.