Yuan at 20-Year High Signals China Paring Intervention

The Chinese yuan’s surge to a 20-year high signals policy makers are becoming more willing to let investment and trade flows determine the exchange rate as the nation’s trade surplus swells to the biggest since 2009.

The yuan climbed 0.2 percent to close at 6.0723 per dollar in Shanghai, after touching 6.0713 earlier, the strongest level since 1993, China Foreign Exchange Trade System prices show. Twelve-month non-deliverable forwards rose 0.3 percent to an all-time high of 6.1195 per dollar at 11:10 a.m. in New York, according to data compiled by Bloomberg.

China’s trade surplus expanded to $33.8 billion, the largest since January 2009, as exports surged, the custom data showed yesterday. The People’s Bank of China will “basically” end intervention in the currency market and widen the trading band where the yuan is allowed to fluctuate in an “orderly way,” central bank Governor Zhou Xiaochuan said last month.

“The trade surplus will put pressure on the yuan to appreciate for some time,” Mark Williams, the London-based chief Asia economist at Capital Economics Ltd., said in a phone interview yesterday. “It’s likely that the next significant reform will be widening the trading band,” to increase the flexibility of the currency, he said.

The PBOC raised the yuan’s reference rate by 0.17 percent to 6.1130 per dollar, the strongest since a peg to the dollar ended in July 2005. The currency can trade a maximum 1 percent on either side of the central bank’s daily fixing.

Best Performer

The yuan has advanced 2.6 percent against the dollar this year, the best performing currency in Asia, extending its gain to 36 percent since 2005.

Confronted with a slowing economy, China last month vowed to allow more private investment in state-controlled industries, loosen its one-child policy and elevate the role of markets in the most sweeping reforms in two decades.

The central bank will “establish a managed floating exchange-rate system based upon market supply and demand,” and will “basically exit from normal foreign-exchange market intervention,” PBOC’s Zhou wrote in an article in a guidebook explaining reforms outlined in the reforms on Nov. 19.

“As China’s financial reforms are gradually rolled out, the CNY needs to become more market determined,” Paul Mackel, head of Asian currency research at HSBC Holdings Plc., wrote in a note yesterday. “This, in the current climate, means the authorities have given in to broad inflow pressures and allowed more near term strength in the CNY.”

Implied Volatility

At 6.0723 per dollar, the spot rate traded 0.67 percent stronger to the official rate, down from the maximum 1 percent it reached in May, according to data compiled by Bloomberg.

Capital Economics’s Williams said that the narrowing difference between official and market rates suggests currency speculation has eased, paving the way for the policy makers to widen the currency band. The central bank doubled the daily trading band in April.

Traders see wider currency fluctuation in the yuan in coming months. One-month implied volatility in the yuan, a measure of expected moves in the exchange rate used to price options, increased 15 basis points, or 0.15 percentage point, to 1.8 percent, the highest since June, according to data compiled by Bloomberg.

In Hong Kong’s offshore market, the yuan rose less than 0.1 percent to 6.0650 per dollar, according to data compiled by Bloomberg. It earlier touched 6.0595, the highest since Nov. 19.

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