China’s Yuan Rises Beyond PBOC Fixing for First Time Since March

China’s yuan rose beyond the central bank’s fixing for the first time since the currency’s trading range was doubled, amid optimism a recovery in the world’s second-largest economy is gathering pace.

The yuan advanced 0.12 percent to close at 6.1633 per dollar in Shanghai, after climbing to an almost five-month high of 6.1624, China Foreign Exchange Trade System prices show. The closing level was 0.08 percent stronger than today’s reference rate of 6.1681, the first premium since the trading band was increased to 2 percent on March 17.

“Letting the market forces have a bigger role in the currency is a good sign that the central bank is comfortable with a modest gain in the yuan,” said Irene Cheung, a Singapore-based strategist at Australia & New Zealand Banking Group Ltd. “External balances for China, including the trade surplus and capital flows, are constructive for the yuan.”

Optimism over the economy has risen with manufacturing expanding at the fastest pace in more than two years in July and gross domestic product growing by a forecast-beating 7.5 percent in the second quarter. The Shanghai Composite Index of stocks rallied 7.5 percent last month, the biggest gain since December 2012, and the currency has strengthened 1.7 percent from this year’s low of 6.2676 per dollar reached April 30.

China’s exports probably increased 7.5 percent from a year earlier in July, compared with 7.2 percent growth in June, according to the median estimate in a Bloomberg survey before official data due Aug. 8. That would be the fastest pace since January. The nation’s trade balance will be in surplus for the fifth straight month, according to another survey.

RQFII Demand

Funds under the Renminbi Qualified Institutional Investor program, which allows yuan raised offshore to buy securities in China, are seeking new quotas. Guotai Junan International Holdings Ltd. is applying to raise its allocation after having almost used up its existing quota, while CSOP Asset Management Ltd., which runs the world’s second-largest exchange-traded fund investing in Chinese stocks, is looking to get more as well.

The onshore spot premium to the fixing shows the PBOC has scaled back its intervention, according to Andy Ji, a Singapore-based foreign-exchange strategist at Commonwealth Bank of Australia.

“It may be that equity portfolio capital inflows are behind the gains,” said Dariusz Kowalczyk, Hong Kong-based strategist at Credit Agricole CIB. “We continue to expect the yuan to reach 6.0 per dollar at year-end but would caution against expecting any more upside in coming days.”

The yuan traded in Hong Kong also reached parity with the People’s Bank of China’s fixing for the first time since March. The currency climbed 0.08 percent to 6.1638 per dollar in Hong Kong, according to data compiled by Bloomberg. That’s the strongest level since March 18. Twelve-month non-deliverable forwards climbed 0.06 percent to 6.2270, trading 1 percent weaker than the spot rate in Shanghai.

One-month implied volatility in the onshore yuan, a gauge of expected swings in the exchange rate used to price options, slipped four basis points, or 0.04 percentage point, to 1.42 percent.

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