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 rose 0.02 percent to close at 6.0710 per dollar in Shanghai, after touching 6.0703 earlier, the strongest level since the end of 1993, China Foreign Exchange Trade System prices show. Twelve-month non-deliverable forwards gained 0.07 percent to a record 6.1155 and have rallied 0.64 percent in seven days, according to data compiled by Bloomberg.

China’s trade surplus expanded to $33.8 billion, the largest since January 2009, as exports surged, data showed on Dec. 8. 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 surge in the trade surplus will lead to more appreciation pressure on the yuan,” Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong, said by phone today. “Fundamentally, China’s determination to implement foreign-exchange reforms, including a wider trading band, means further room for yuan gains.”

The PBOC raised the yuan’s reference rate by 0.03 percent to 6.1114 per dollar today, the strongest since a peg to the greenback ended in July 2005. The currency can trade a maximum 1 percent on either side of the daily fixing. The central bank has boosted the reference rate by 0.35 percent in December.

Best Performer

The yuan has advanced 2.62 percent against the dollar this year, the best-performing currency in Asia, extending its gain since 2005 to 36 percent.

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 at a Nov. 9-12 Communist Party plenum.

“It is suggestive that policy makers may be allowing already the degree of flexibility to some degree that was hinted at in recent statements,” Sacha Tihanyi, a Hong Kong-based currency strategist at Scotiabank, wrote in a note to clients yesterday.

Inflow Pressure

China’s central economic working conference began this morning in a meeting that will set economic targets and main tasks for 2014, the official Xinhua News Agency reported.

Yuan positions at China’s financial institutions accumulated from foreign-exchange sales, a barometer of capital flows, climbed the most in nine months in October. The positions rose 441.6 billion yuan ($73 billion) to 28 trillion yuan, the highest in official data going back to 2000.

“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 6.0710 per dollar, the spot rate traded 0.67 percent stronger than the PBOC fixing, down from the maximum 1 percent it reached in May, according to data compiled by Bloomberg.

“It’s likely that the next significant reform will be widening the trading band” to increase the flexibility of the currency, Mark Williams, the London-based chief Asia economist at Capital Economics Ltd., said in a phone interview yesterday. The narrowing difference between official and market rates is paving the way for a wider range, he said. The central bank doubled the daily trading band in April 2012.

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 1.82 percent this week, data compiled by Bloomberg show. It reached 1.86 percent today, the highest since June.

In Hong Kong’s offshore market, the yuan traded at 6.0651 per dollar, little changed from yesterday’s close, according to data compiled by Bloomberg. It touched 6.0595 yesterday, the highest since Nov. 19.

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