Yuan on course to break 6 per dollar barrier in 2014

Economists expect yuan to continue rising against greenback this year, even as it strengthens against other major currencies

PUBLISHED : Monday, 13 January, 2014, 12:27am
UPDATED : Monday, 13 January, 2014, 9:59am

The yuan is on track to break through the level of 6 per US dollar this year, but the pace of gains is expected to be held back by concerns over China's export slowdown and reduced capital inflows as the United States tapers its monetary stimulus.

The yuan will rise 2 per cent to 5.93 per US dollar by the end of this year, according to the median estimate of nine economists polled by the South China Morning Post.

The forecast gain will see the yuan pass through the psychologically important level of 6 to the dollar for the first time, even as the greenback strengthens against other major currencies.

Last year, the yuan gained 2.9 per cent against the dollar.

The yuan reference rate, the onshore daily fixing rate set by the People's Bank of China, set record highs 41 times last year, helped by a strong trade surplus growth and a notable swing in capital and financial accounts back to a surplus amid the appeal of higher onshore interest rates.

The "redback" would remain the bright spot in regional currency markets this year, experts say, after the yuan stood with the South Korean won as the only gainers against the dollar last year.

But concerns over exports - underscored by a surprise decline in last month's figure - could make Beijing more cautious in allowing the yuan to appreciate too quickly in the short term because of the impact on jobs and exporters.

Exports last month rose 4.3 per cent from a year earlier, down from a much stronger 12.7 per cent increase in November, according to customs data released on Friday.

"Fundamentally, the expected global economic recovery should support China's export sector, which should stabilise its current account surplus at about 2 per cent of gross domestic product," said JPMorgan economist Zhu Haibin, who expects the yuan to rise less than 1 per cent this year to 6 against the dollar.

The mainland's trade surplus widened 12.8 per cent last year.

Some economists see less pressure from capital inflows as investors cash out of emerging markets for the perceived safety of US assets.

"The broader market environment of capital retreating from emerging markets would reduce the pressure of appreciation of the yuan this year. Meanwhile, as foreign investors hold a consensus view that China's economic growth would maintain at a low 7 per cent, that would somehow help curb the hot money inflows," Standard Chartered economist Kevin Lau said.

Some economists also said that the yuan had almost reached an equilibrium level after adding more than 36 per cent since the currency's landmark revaluation in 2005.

More two-way swings were widely expected to be seen throughout the year as the daily trading band for the currency was likely to be widened, they said.