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.

BusinessGlobal Economy

Yuan gain points to confidence in Beijing

Currency tracks US dollar higher amid signs of quickening economic growth

PUBLISHED : Wednesday, 10 April, 2013, 12:00am
UPDATED : Wednesday, 10 April, 2013, 3:57am

The yuan is rising in tandem with the US dollar for the first time since 2011, a sign mainland policymakers are confident the nation's growth will pick up from its slowest pace in 13 years.

"China's economy is too strong for them to get into a currency war," said Sean Callow, a strategist at Westpac Bank in Sydney.

"China's trade balance has been surprising on the upside. Exports have held up better than many investors thought. That's a real positive for net demand for the yuan."

The yuan reached a 19-year high of 6.1986 per dollar on April 2, after rising 0.3 per cent in the first quarter. Its rally coincided with a 4 per cent gain in the dollar index tracked by IntercontinentalExchange. That gauge tracks the greenback against the currencies of the United States' six biggest trading partners.

The last time the yuan and the dollar strengthened in lockstep was in the final three months of 2011, an appreciation that foreshadowed the biggest expansion in Chinese manufacturing in more than a year.

The yuan gained 1.5 per cent in the fourth quarter of that year, while the dollar index rose 2.1 per cent.

The rally in the two currencies was followed by four monthly increases in China's purchasing managers' index manufacturing indicator.

As the Bank of Japan devalues the yen with increased asset purchases and North Korea's nuclear threat pummels the won, a recovery in the world's second-largest economy is leaving little room for Premier Li Keqiang to rein in the yuan.

Chinese manufacturing output grew last month at the fastest pace in 11 months, according to the official PMI, and data shows that exports rose more than 21 per cent in both January and February, the best start to a year since 2010.

The trade surplus for the two-month period was US$44.4 billion, in contrast to a US$4.9 billion deficit a year earlier.

The yuan has on average been within 0.1 percentage point of the strong end of its permitted trading band for the past six months.

The yuan will reach 6.16 per dollar by the end of the year, according to Westpac. Bank of America predicts 6.05, lower than the median forecast of 6.12 in a Bloomberg poll.

The two currencies have moved in opposite directions for most of the past three years, suggesting that China's central bank tends to limit the yuan's appreciation in periods when the dollar is already strengthening against other currencies.

China kept the yuan at about 6.83 per dollar for two years during the global financial crisis, before letting it resume its appreciation in June 2010.

The recent strength of the yuan and dollar coincide with indications that growth is gathering pace in the world's two largest economies.

China's economy will expand 8.1 per cent this year, according to the median forecast in a Bloomberg survey, compared with 7.8 per cent last year, its slowest pace of growth since 1999. The government has set a 7.5 per cent growth target for this year, the same goal as for last year.

In the US, a recovery in the housing and labour market propelled the dollar index to 83.494 last Thursday, its highest level since August.


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