Yuan Trades Near 20-Year High as Yield Gap Seen Luring Capital

The yuan traded near its strongest level in 20 years on speculation the widening yield advantage of Chinese assets will attract capital inflows.

The People’s Bank of China boosted the currency’s reference rate for a second day today, raising it by 0.03 percent to 6.1145 per dollar. The yuan is up 2.6 percent this year, the best performance among the 11 most-traded Asian currencies. The yield premium on Chinese one-year government bonds over similar-maturity U.S. notes increased by 1.4 percentage points to 4.1 percentage points in 2013, according to data compiled by Bloomberg.

The yuan closed at 6.0714 per dollar in Shanghai, China Foreign Exchange Trade System prices show. That was little changed from 6.0702 yesterday, the strongest level since the government unified the market and official exchange rates at the end of 1993. The currency can diverge a maximum 1 percent from the PBOC’s daily fixing.

“The yuan is expected to continue modest appreciation over 2014,” said Khoon Goh, a Singapore-based strategist at Australia & New Zealand Banking Group Ltd. “The yuan will remain underpinned by a large trade surplus and capital inflows enticed by the country’s attractive interest rates.”

China received $96 billion of overseas capital in the first two months of this quarter, according to a Bloomberg estimate based on official data. Inflows were $38 billion in November, compared with $57.5 billion in October. Goh forecast the yuan will climb to 5.98 per dollar by the end of 2014.

In Hong Kong’s offshore market, the yuan traded at 6.0714 per dollar, from 6.0708 yesterday, data compiled by Bloomberg show. Twelve-month non-deliverable forwards slipped 0.06 percent to 6.1375, a 1.1 percent discount to the spot rate in Shanghai.

One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, climbed 10 basis points, or 0.1 percentage point, to 1.86 percent.

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