Yuan Advances to 19-Year High on PBOC Fixing, Convertibility Bet

China’s yuan rose to a 19-year high as the central bank boosted the currency’s reference rate and on speculation the government will further open the nation’s capital markets to offshore investors.

The People’s Bank of China strengthened the yuan’s daily fixing 0.04 percent to 6.1726 per dollar, after the Bloomberg Dollar Index lost 1 percent in the last three days. China should make monetary controls more coordinated and use multiple tools to ensure stable and moderate credit growth, according to a front-page commentary in today’s Financial News, which is published by the central bank. The nation will push forward with capital-account convertibility, the State Administration of Foreign Exchange said this week.

“The dollar is overall a bit weaker and continued yuan appreciation will help China to rebalance the economy,” said Patrick Bennett, a Hong Kong-based strategist at Canadian Imperial Bank of Commerce. “The internationalization of the yuan will need balanced supply and demand as there’s still plenty of money that wants to go into China. We believe the yuan’s equilibrium is at a stronger level.”

The currency gained 0.04 percent to close at 6.1192 per dollar in Shanghai, China Foreign Exchange Trade System prices show. It touched 6.1189 earlier, the strongest level since the government unified the official and market exchange rates at the end of 1993. The spot rate was 0.87 percent stronger than the PBOC’s fixing, compared with the maximum allowed divergence of 1 percent.

Widening Spread

“The widening spread of the fix and the spot suggests there’s demand for both onshore yuan and offshore yuan,” Bennett said.

The yuan has appreciated 1.8 percent against the dollar in 2013, making it the sole gainer among Asia’s 11 most-traded currencies and the best performer in 24 emerging-market pairs tracked by Bloomberg. The Japanese yen was the region’s worst-performer, while India’s rupee has tumbled 10 percent this year to reach a record low today.

Sentiment on Chinese assets recovered in late July as local media cited Premier Li Keqiang as saying the government sees 7 percent growth as the bottom line. The nation set a 7.5 percent full-year expansion goal in March.

“Expectations of yuan depreciation have declined after the government signaled it’ll work toward realizing its growth target,” said Eliza Liu, chief economist in Hong Kong at CCB International Holdings Ltd., a unit of China’s second-largest bank. “However, the yuan is unlikely to gain significantly going forward on gloomy export prospects and unfavorable capital flows.”

Trade Data

China’s trade growth may slow in the second half as the external environment is “not optimistic,” according to a State Information Center report published in China Securities Journal today. The government needs to maintain a stable yuan in the short term to support exporters, the report said.

Shipments probably rose 2 percent from a year earlier in July, compared with a 3.1 percent decrease in June, according to the median estimate in a Bloomberg survey before data due tomorrow. That’s below last year’s monthly average of 8.3 percent growth.

In Hong Kong’s offshore market, the yuan climbed 0.04 percent to 6.1184 per dollar, according to data compiled by Bloomberg. It gained to a record 6.1060 earlier. Twelve-month non-deliverable forwards advanced 0.01 percent to 6.2772, a 2.5 percent discount to the onshore spot rate.

One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, fell three basis points, or 0.03 percentage point, to 1.23 percent today.

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