The yuan strengthened beyond 6.4 per dollar for the first time in 17 years, supported by the Federal Reserve’s pledge to keep interest rates at a record low and signs China will use currency gains to help rein in inflation.
The currency rose the most since November and 12-month non- deliverable forwards climbed to a three-month high after the central bank’s daily fixing had its biggest jump of 2011. Customs bureau data released yesterday showed record exports helped drive the trade surplus to a two-year high in July, while the Fed a day earlier pledged to maintain near-zero interest rates through mid-2013. China’s consumer prices climbed 6.5 percent last month from a year earlier, the fastest pace in three years, official data show.
“The inflation and trade data, together with the Fed’s policy to maintain extremely low interest rates, have fueled faster appreciation,” said Banny Lam, an economist at CCB International Securities in Hong Kong. “Strong economic growth, supported by the latest export figures, also provides investors with confidence to buy the yuan in these turbulent times.”
The yuan rose 0.33 percent to 6.3970 per dollar as of 10:14 a.m. in Shanghai, according to the China Foreign Exchange Trade System. The currency touched 6.3938 earlier, the strongest level since the country unified official and market exchange rates at the end of 1993. The central bank set its reference rate 0.27 percent stronger at 6.3991, the biggest increase since November. The yuan is allowed to trade up to 0.5 percent on either side of the official rate.
Overseas sales rose 20 percent from a year earlier to $175.1 billion in July, exceeding imports by $31.5 billion, the customs bureau reported yesterday. U.S. officials including Treasury Secretary Timothy F. Geithner and New York Senator Charles Schumer say China keeps the yuan undervalued to gain an unfair trade advantage.
China’s gross domestic product rose 9.5 percent from a year earlier in the second quarter, while the U.S. recorded a 1.6 percent gain for the period, official figures show. China’s economy will expand 9.6 percent in 2011 and U.S. growth will be 2.5 percent, the International Monetary Fund forecast in June.
In Hong Kong’s offshore market, the yuan gained 0.32 percent to 6.3915 per dollar. Twelve-month non-deliverable forwards rose 0.70 percent to 6.3103, a 1.4 percent premium to the onshore exchange rate, based on data compiled by Bloomberg.
China may adjust its foreign-exchange policy to place less emphasis on the yuan’s value versus the dollar, the Economic Information Daily reported today, citing Pan Zhengyan, a researcher with the Shanghai Academy of Social Sciences.
The People’s Bank of China buys dollars to limit currency gains as capital flows into the country, a policy that’s made it the biggest foreign holder of Treasuries. Faster appreciation may stem purchases of U.S. government debt as the Fed’s loose monetary policy weighs on the dollar, which fell against 14 of 16 major currencies tracked by Bloomberg this year.
Policy makers should urgently assess the risks from being the main investor in U.S. debt and accelerate diversification of the nation’s foreign-exchange reserves, the Financial News reported today, citing Xia Bin, a central bank adviser.
In the short term, China can reduce risk by adjusting the asset structure of its reserves, the central bank publication cited Xia as saying. In the medium- and long-term, the key is to keep foreign-exchange holdings at a “reasonable” level, the newspaper cited Xia as saying. Xia is an academic member of the monetary policy committee of the People’s Bank of China.
China’s $3.2 trillion of reserves are the world’s largest and compare with a combined $1.1 trillion for Brazil, India and Russia.
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