The Chinese yuan, also known as the renminbi, is already convertible under the current account - the broadest measure of trade in goods and services. However, the capital account, which covers portfolio investment and borrowing, is still closely managed by Beijing because of worries about abrupt capital flows.
Stronger yuan deters buyers at Canton Fair
Key event provides a gauge on traders' view of impact of the trend, with many bracing for the currency to appreciate past 6 to the US dollar
Many buyers and exporters at the Canton Fair say they are expecting the yuan to strengthen further in the next 12 months, threatening to dampen trade sentiment in the world's second-biggest economy.
The currency passed 6.10 to the US dollar yesterday, the first time in 20 years, after Beijing stepped up measures to liberalise yuan trading and speculation increased it would raise the official daily fixing exchange rate.
Seven of eight buyers and exporters polled by the South China Morning Post at the mainland's largest trade show in Guangzhou said the yuan would pass 6 against the greenback in the next 12 months, translating to at least a 1.8 per cent appreciation.
Two of the people surveyed at the fair, which opened on Tuesday, said the yuan would even rise 5 per cent to 5.80 in the next 12 months.
The stronger yuan has suppressed buying sentiment at the trade fair, especially demand from emerging markets, such as Russia, Indonesia and India, whose currencies are declining.
Shenzhen Hawkins, an exhibitor that produces food processors for overseas markets, said orders from Southeast Asian buyers had fallen 40 per cent.
Abdul Chodir, who runs an Indonesian trading company, said that as the yuan appreciated and the Indonesian rupiah declined, prices of machinery spare parts from China had shot up by 20 per cent. "I will only buy half the contract size this year over last year because of the change in exchange rates," he said.
The yuan has risen 2.2 per cent against the greenback this year while the rupiah has dropped more than 10 per cent. The Indian rupee has fallen almost 15 per cent against the dollar since May and the Thai baht has slipped more than 4 per cent this year.
Yin Jinshan, the owner of a lighting company in Hubei province, said traffic flow on the first day of the show had slumped 20 to 30 per cent from last year. He blamed the depreciating currencies in emerging markets, and is particularly worried about orders from India as the subcontinent accounts for a third of his sales.
"I wish the mainland government could help to contain the yuan and bring it back to the level of 6.50 [per dollar]," Yin said.
Yin is not the only mainland exporter suffering from the impact of yuan appreciation and rising wages over the past two years.
When exporters receive payment 30 or 40 days after a contract is signed, they risk receiving less money in yuan if the currency rises against the dollar, the settlement currency for all international contracts.
"The yuan is proving stronger than we have expected," a Credit Suisse report said yesterday.
The securities house predicts there is a 60 to 70 per cent probability that Beijing will widen the trading bands for yuan spot to 1.5 to 2 per cent from the current 1 per cent over the next months.
This would mean the yuan will rise to 6.02 to 6.04 to the dollar in the coming months, it said in the report.