May 7 (Bloomberg) -- The yuan strengthened the most this year as Premier Li Keqiang pledged to come up with a plan this year that would allow investment capital to move more freely in and out of China.
The proposal, part of the government efforts to loosen control over the currency and interest rates, will include a mechanism enabling individuals to invest overseas, the nation’s Cabinet said yesterday. People’s Bank of China Deputy Governor Yi Gang said last month the yuan’s trading band will be widened “in the near future.” The central bank raised the daily reference rate 0.05 percent to 6.2083 per dollar, shy of the record 6.2082 on May 2. The currency is allowed to diverge a maximum 1 percent from the fixing.
“China is moving forward with exchange-rate reform and making the yuan more globally used,” said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. “There have been bets the trading band will be widened, giving more room for appreciation. Yet, it’s unlikely to happen soon as that might fuel speculation and worsen inflation.”
The yuan rose 0.2 percent, this year’s largest one-day gain, to close at 6.1541 per dollar in Shanghai, according to the China Foreign Exchange Trade System. It dropped 0.18 percent yesterday, the most since December, as China intensified scrutiny of cash transfers from abroad. The currency has gained 1.2 percent this year and touched a 19-year high of 6.1521 on May 6.
In Hong Kong, the yuan gained 0.28 percent, the most in four months, to 6.1585 per dollar, according to data compiled by Bloomberg. It dropped 0.35 percent yesterday, the biggest loss since March 2012, after the currency regulator said it would step up efforts to ensure companies and banks are not bringing in cash for speculative purposes.
Warning notices will be sent out to trading companies whose goods and capital flows do not match, as well as to those that are bringing large amounts of funds into China, the State Administration of Foreign Exchange said in a May 5 statement. Chinese lenders must boost foreign-exchange positions when loan-to-deposit ratios for overseas currencies exceed reference levels, it said.
The clampdown may slow yuan appreciation in the near term, HSBC Holdings Plc strategists Paul Mackel and Ju Wang wrote yesterday in a research note. The measures do not mark a turning point for the yuan, according to Wee-Khoon Chong, a Hong Kong-based strategist at Societe Generale SA.
“Renminbi remains very attractive in the long-run,” Chong wrote in a note yesterday. “A check on the currency is there to manage rather than reverse the trend.”
The yuan will gain 0.6 percent in the rest of the year to reach 6.12 per dollar by Dec. 31, according to the median forecast of analysts in a Bloomberg News survey. Twelve-month non-deliverable forwards advanced 0.22 percent today to 6.2280, a 1.2 percent discount to the onshore exchange rate.
One-month implied volatility in the yuan, a measure of expected moves in the exchange rate used to price options, decreased six basis points, to 0.06 percentage point, to 1.5 percent.
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