China Researcher Says Hot Money Adds to Yuan Pressure

The Chinese yuan is set to strengthen as rising inflows of speculative capital add to pressure on the currency, the head of a Ministry of Commerce research institute said.

“Hot money is flowing into China, and that will push up the yuan exchange rate,” Huo Jianguo, president of the Chinese Academy of International Trade and Economic Cooperation under the ministry, said in an interview in Beijing yesterday.

The yuan had its biggest weekly gain in six months after People’s Bank of China Deputy Governor Yi Gang said the daily trading band that’s been limiting appreciation against the U.S. dollar since October may be widened. The largest jump in foreign-exchange reserves in almost two years in the first quarter adds to signs capital inflows are increasing.

“China’s situation is exactly the opposite” of Japan’s, said Huo, who previously worked as a trade official in the commerce ministry. The yen is expected to continue weakening amid the Bank of Japan’s policy easing, Huo said, estimating the currency could drop to 110 per dollar this year.

The yen has dropped almost 20 percent since mid-November, when the election which brought Prime Minister Shinzo Abe to power was announced. He won on a platform of unlimited monetary easing to end more than a decade of deflation.

Testing Band

Yi commented on widening the yuan’s trading band on April 17 in Washington, where he was attending an International Monetary Fund conference, ahead of a two-day meeting of finance ministers and central bank governors from Group of 20 nations that ended yesterday.

The PBOC allows the yuan to fluctuate against the U.S. dollar by as much as 1 percent either side of a daily reference rate. The currency has been within 0.1 percent of the upper end of its permitted trading range most days since October. The spot rate yesterday was 1 percent stronger than the PBOC fixing.

The yuan, also known as the renminbi, has appreciated 0.9 percent this year, reaching a 19-year high of 6.1723 per dollar on April 17, according to China Foreign Exchange Trade System prices. The currency gained 0.24 percent this week to close at 6.1776 per dollar in Shanghai.

Direct trading between the yuan and the Australian dollar that started this month may also help to boost demand and confidence in the currency, Huo said.

HSBC Holdings Plc raised its estimate for yuan appreciation this year after stronger-than-expected gains in the first quarter, according to an April 17 report. The bank now sees the yuan trading at 6.14 per dollar by the end of the year, up from a previous estimate of 6.18, a full-year gain of around 1.5 percent.

Too Fast

The PBOC has “shown increasing tolerance” of a stronger yuan to help promote “internationalization” of the currency, analysts led by Paul Mackel, head of Asian currency research in Hong Kong, said in the HSBC report.

“The yuan’s appreciation recently has been a bit too fast,” Zhang Yongjun, an economist with the government-backed China Center for International Economic Exchanges, said at a forum in Beijing yesterday. So-called hot money may be flowing into China under the guise of exports due to expectations the currency will strengthen, he said.

Rapid yuan gains “have already inflicted pain on our exporters,” said Zhang, who previously worked at the State Information Center, which is affiliated with the National Development and Reform Commission. “If we slow the pace of gains appropriately by taking some appropriate controls, it would benefit our exports.”

More Bullish

China’s foreign-exchange reserves, the world’s biggest at $3.44 trillion, jumped $128 billion in the first quarter from end-December. The central bank and financial institutions bought a record 684 billion yuan of foreign currency from customers in January and 295 billion yuan in February, indicating higher capital inflows.

Since the third quarter, “the private sector has turned more bullish” on the yuan, HSBC said. “Strong inflow pressures are likely to soften in the rest of” the second quarter “but we expect the RMB to stay resilient,” they wrote.

Before it's here, it's on the Bloomberg Terminal.