Yuan Gains a Second Day as Central Bank Sets Record Fixing

The yuan advanced for a second day after the People’s Bank of China strengthened the currency’s reference rate to a record.

The central bank will not intentionally depreciate the yuan to boost competitiveness, People’s Bank of China Governor Zhou Xiaochuan was cited as saying by China Central Television yesterday. Yuan positions at Chinese financial institutions stemming from foreign-exchange transactions, a gauge of capital inflows, surged 294.4 billion yuan ($48 billion) in April after a first-quarter increase of 1.22 trillion yuan that was more than four times the gain a year earlier, official data show.

“There are still capital inflows coming in and that continues to put appreciation pressure on the renminbi,” said Khoon Goh, a senior strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “The PBOC is accommodating that appreciation because if they don’t then the PBOC will be forced to intervene in the market and accumulate foreign-exchange reserves that are already at a high level.”

The yuan advanced 0.05 percent to 6.1286 per dollar in Shanghai, according to China Foreign Exchange Trade System prices. It reached 6.1210 on May 27, the strongest level since the government unified official and market exchange rates at the end of 1993. The monetary authority boosted the yuan’s reference rate by 0.11 percent to a record 6.1735 per dollar.

The spot rate is allowed to diverge from the fixing by a maximum 1 percent and China intervenes in the currency market to prevent a breach of the trading band. The nation’s foreign-exchange reserves, the world’s largest, climbed $131 billion in the first quarter to a record $3.44 trillion.

Offshore Yuan

In Hong Kong’s offshore market, the yuan rose 0.08 percent to 6.1320 per dollar, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards were little changed at 6.2502, a 1.9 percent discount to the onshore exchange rate.

Investors should bet on a retreat in the yuan as the real effective exchange rate has surged rapidly, eroding the competitiveness of China’s exporters, Credit Agricole CIB said in a note yesterday.

One-month implied volatility in the yuan, a measure of expected moves in the exchange rate used to price options, held at 1.93 percent.

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