'Yuan to remain strong' based on China recovery

The currency rose to its highest against the US dollar in nearly 20 years at one point yesterday

PUBLISHED : Thursday, 18 October, 2012, 12:00am
UPDATED : Tuesday, 23 January, 2018, 11:43am

The yuan exchange rate is expected to remain strong in the coming quarters before a possible interest rate rise by the mainland in the second half of next year, according to investment bank Nomura.

The mainland economy was expected to recover in the fourth quarter from the July-to-September period, lending support to a strong Chinese currency in the next few months, Nomura economist Zhang Zhiwei said.

It is widely expected that the economy slowed to about 7.4 per cent in the third quarter this year from 7.6 per cent in the second quarter, as domestic demand was not robust enough to offset declining exports that were dented by the European debt crisis. China is set to release third-quarter economic data today.

"The mainland economy is likely to rebound in the fourth quarter as the central bank has been encouraging lending, and investments in new construction projects are picking up," Hong Kong-based Zhang said yesterday. The central bank was likely to increase interest rates in the second half of next year when inflation climbed with rising overseas prices for soya beans and corn, and the tightening measures would slow economic growth and snap the yuan advance, he said.

The yuan rose to its highest against the US dollar in nearly two decades in intraday trading yesterday, triggered by the new round of quantitative easing in the US.

It was also spurred by expectations of more policies by Beijing to counter an economic slowdown after the once-a-decade leadership transition. The spot yuan gained about 2 per cent against the greenback in the past three months.

However, in the medium to long term, the Chinese currency would not stage one-way appreciation, and "sometimes we'll see relatively long periods of depreciation", Zhang said.

Foreign Ministry spokesman Hong Lei repeated yesterday that China did not manipulate its currency, and called on the two US presidential candidates, both of whom have been talking tough on China, to view the country objectively.

Nomura economists forecast China's trade surplus will turn to a deficit in 2014.