Yuan hits record on expectations for faster pace of appreciation
The yuan broke through 7.30 to the US dollar yesterday, setting a record on the first trading day of 2008, a year in which analysts expect the mainland to allow a faster appreciation of its currency as it tries to tame inflation and cool its economy.
Analysts say the yuan could rise as much as 10 per cent this year after gaining more than 6 per cent against the greenback last year.
'The value of one-year yuan non-deliverable forward contracts traded yesterday at 6.66 to the dollar, reflecting that the market expected it could rise 8 to 9 per cent in 12 months,' said Andrew Fung Hau-chung, a deputy general manager at Hang Seng Bank.
The yuan rose as high as 7.293 to the dollar yesterday after the Chinese Foreign Exchange Trading System set the mid-price at 7.2996 when the market opened. It closed at 7.2934, or 0.146 per cent higher than the close of 7.3041 last Friday.
Mr Fung said Beijing had raised interest rates and tightened monetary policy so it was natural for the government to allow the yuan to rise faster.
People's Bank of China governor Zhou Xiaochuan said in a New Year's message on the bank's website that the central bank would further control liquidity and improve the currency exchange mechanism this year to adjust overall demand and improve the balance of international payments.
Daniel Chan Po-ming, a senior investment strategist at DBS Bank (Hong Kong), also expects the pace of yuan appreciation to accelerate to this year.
'It's better to allow the yuan to rise faster to reduce the pressure of inflation rather than just rely on interest-rate rises to cool the overheated economy,' Mr Chan said.
He added that strengthening the mainland currency would also ease pressure from western countries calling for a faster yuan appreciation.
The country's inflation rate rose to 6.9 per cent in November, an 11-year high.
Mr Chan said Hong Kong would suffer higher 'imported' inflation in light of the stronger yuan and the Hong Kong dollar would weaken against other currencies because it was pegged to a weak US dollar.
The rising yuan could have a severe impact on some Hong Kong manufacturers on the mainland, especially those that relied on the mainland's raw materials and whose finished products were exported overseas, he said.
Meanwhile, the Hong Kong dollar fell to a four-month low against the greenback, dropping to HK$7.8141 during the late session yesterday, compared with HK$7.7997 previously, due to lower interbank rates.
