Yuan heads for key level against dollar
A breach of 6 yuan barrier is seen as coinciding with upcoming rounds of Sino-US talks amid expectations of a widening of the trading band
The yuan could breach another key psychological level this year to trade at 6 to the US dollar as the mainland authorities seem inclined to ease the reins on the currency further.
Spot yuan closed yesterday at 6.1287 per dollar in Shanghai. It has been hitting 19-year highs frequently in the past few months and has strengthened about 1.7 per cent against the dollar since April.
That has already surpassed the 1.03 per cent appreciation for the whole of last year, as capital unleashed by quantitative easing in developed countries flooded into China betting on robust economic growth and greater financial reforms.
Notably, the yuan's rally continues unabated even after mainland officials and economists earlier this year said the currency had reached its equilibrium.
"There has been a policy to drive down dollar-yuan fixing since the end of March and this will continue through both the June 7-8 US-China meetings and the July 8-12 Sino-US Strategic and Economic Dialogue," Nomura Securities economists Craig Chan and Teo Wee Choon wrote in a research note.
They expect the yuan fix to strengthen to 6.13 by the Sino-US dialogue date, based on Beijing's increasing tolerance for yuan appreciation.
"It is possible for spot dollar-yuan to fall below the 6 figure, when considering a potential widening of the yuan trading band from the current 1 per cent to 2 per cent," they said in the note.
Yi Gang, a deputy governor of the People's Bank of China, said at an International Monetary Fund conference in Washington in April that the yuan's trading band would soon be widened.
Many economists expect the band, within which spot yuan is allowed to float, will be broadened to 1.5 to 2 per cent either way of the daily reference rate set by the PBOC.
The official announcement could come as early as this month, they say, before President Xi Jinping makes his first trip to the United States after assuming power.
When former president Hu Jintao visited the White House on January 19, 2011, the central parity rate fell by 66 basis points.
Wang Tao, an economist at UBS Securities, said she was "puzzled" by the yuan's persistent appreciation as it was not supported by economic fundamentals.
The country's trade surplus totalled US$43 billion in the first quarter but the surplus adjusted for overstated exports to Hong Kong was only US$2.4 billion, Wang said.
With the current account surplus set to narrow and the growth of foreign direct investment likely to slow as the mainland economy gears down, further gains in the yuan should be limited, according to Wang.
"We expect the fixing to stay around 6.20 at the end of this year, but it could end the year 1 to 2 per cent higher given the central bank's desire to boost the exchange rate and the possibility of the capital account liberalisation coming sooner rather than later," she said.
The State Council last month announced that an operational plan to achieve full convertibility would be presented this year, indicating that steps towards a market-based exchange rate system and capital account liberalisation may be accelerated.
The IMF estimates the actual value of the yuan was 4.214 to the dollar last year, based on purchasing power parity.
But Joanne Yim, the chief economist at Hang Seng Bank, said the yuan was undervalued by 0.6 per cent to 10.1 per cent last year, depending on the approach used to calculate its true value.
A 10 per cent strengthening of the yuan against the Hong Kong dollar could cause the city's consumer inflation to rise by about 0.5 percentage point, assuming a complete exchange rate pass-through to consumer prices, Yim said.
"The estimated effect may appear to be rather modest compared with the general perception," she said.
Raymond Yeung Yu-ting, a senior economist at ANZ Banking in Hong Kong, however, said yuan appreciation would not drive up inflation significantly in the city. The bank maintains its forecast that the yuan will reach 6.15 per US dollar by the end of this year.
"The recent advance in the yuan exchange rate, which was driven by capital inflow, would be sustainable," Yeung said.
Additional reporting by Kwong Man-ki in Beijing