China gives the yuan more muscle

PUBLISHED : Friday, 27 April, 2012, 12:00am
UPDATED : Friday, 27 April, 2012, 12:00am


Beijing set the reference rate for the yuan at a record high yesterday, one week ahead of an economic summit between the nation's top policymakers and their United States counterparts.

The People's Bank of China put the central parity rate at 6.2829 per US dollar yesterday, 0.15 per cent higher than Wednesday's 6.2923 per dollar, and the third straight increase.

On the China Foreign Exchange Trade System, the yuan rose as much as 0.09 per cent in intraday trading before slipping 0.03 per cent from a day earlier to end at 6.3060.

The central bank sets the reference rate each day and the value of the yuan can rise or fall as much as 1 per cent during the intraday day trading. The daily fixing, known as central parity rate, normally reflects Beijing's attitude towards the value of the currency after China lifted a peg to the US dollar in 2005.

'China is sending a friendly message to the US and other major economies that we don't want to see trade frictions,' said Yinshu Capital chairman Huang Feng. 'The reference rate is more a result of politics than economics.'

Vice-Premier Wang Qishan is due to meet US Treasury Secretary Timothy Geithner in the fourth round of a strategic and economic dialogue in Beijing next week.

Beijing, under pressure from US politicians to revalue the currency, has been gradually making the yuan stronger, a move that dented the mainland's export growth as Chinese-made products consequently became more expensive.

The central bank doubled the size of the daily trading band to 1 per cent from the previous 0.5 per cent, hoping to make the currency value more flexible to deflect criticism from Western countries.

The record central parity rate did not translate into an all-time high closing of the yuan yesterday because traders were mixed about the short-term direction of the currency's value.

Li Yang, a former adviser to the People's Bank of China, said earlier this year that the yuan's value would stabilise by the end of the year amid the country's shrinking trade surplus.

The State Administration of Foreign Exchange reported yesterday that capital inflows fell by 56 per cent year on year to US$49.9 billion in the first quarter, leading to a smaller increase in foreign reserves. This in turn could ease the pressure on the yuan to strengthen further.

A consensus prediction among economists is that the yuan would strengthen to 6.2 against the dollar in the coming months in tandem with wild short-term fluctuations.

'The more drastic the step taken by the central bank to strengthen the daily fixing, the more likely a correction in trading would take place,' said a currency trader at the Bank of China. 'It doesn't seem that China can afford a higher yuan from now on,' he added. Since 2004, the yuan has risen nearly 30 per cent against the US dollar.

'The business environment has already become tough for export-oriented companies,' said Chi Bangfa, an owner of a machinery business.