Yuan rises after senior PBOC research official sees room for rate increase
Chinese currency rose as much as 0.25pc on Monday to 6.4725 against the dollar, marking its highest level since September 8
The yuan strengthened on Monday after a central bank researcher said there was room to raise interest rates in the short term, easing expectations of capital outflow from the mainland.
“There is room for an increase in interest rates in the short term as industrial product prices and corporate profitability have improved since last year,” the People’s Bank of China’s (PBOC) research bureau deputy head Ji Min told China Daily over the weekend.
Official rhetoric has been turning relatively hawkish in recent weeks as reports showed central bank researchers had agreed higher interest rates would help squeeze any asset bubble and curb debt expansion.
Other PBOC officials believe the potential interest rate hikes and the promotion of production capacity will further improve returns on investments by industrial enterprises.
The outlook for tighter liquidity conditions onshore as well as easing capital outflows would cause yuan appreciation expectations to intensify as investors chose to hold yuan assets instead of selling in exchange for US dollars, according to analysts.
On Monday, the Chinese currency rose as much as 0.25 per cent to 6.4725 against the dollar, marking its highest levels since September 8.
The PBOC daily yuan reference rate has risen six out of the past seven trading days to its strongest level since May 2016. Traders are allowed to trade up to 2 per cent on either side of the reference rate for the day.
Christy Tan, Asia head of markets strategy research at National Australia Bank, predicts the yuan to push further towards 6.45 per dollar in coming weeks because of tight liquidity conditions in the mainland and optimism offshore about portfolio inflows.
Similarly, Stephen Innes, APAC head of trading at Oanda, forecasts the yuan to reach 6.30 this year because of prolonged US dollar weakness and given the “PBOC appeared unconcerned with rising rates and more concerned with attracting capital inflows”.
HSBC said in a research note that the yuan can overshoot in the near term, although it was not starting a new one-way appreciation trend. As such, the authorities have gained confidence to resuming plans to develop the offshore yuan market after a two-year pause.
On Friday, the PBOC released a “Circular on Improving Cross-Border RMB Business and Facilitate Trade and Investments” which included measures to support companies in using yuan for trade settlement, allow individuals to use yuan in cross-border current account transactions and facilitate companies to repatriate their yuan funds raised offshore to onshore.
Reflecting increasing expectations of yuan appreciation, China’s foreign exchange reserves rose US$20.2 billion in December to US$3.14 trillion, the highest since September 2016 and the biggest monthly gain since July, compared with to expectations of a rise to US$3.125 trillion, according to data over the weekend.