The mainland's currency, the yuan, headed for its third monthly gain yesterday as the central bank set a record fixing for the currency, fuelling optimism officials will accelerate exchange-rate mechanism changes.
The People's Bank of China raised the reference rate by 0.04 per cent to 6.1796 per US dollar, the strongest since a peg against the greenback ended in July 2005.
The priorities of financial reforms this year include exchange-rate liberalisation and yuan capital-account convertibility, the National Development and Reform Commission said on Thursday.
Fullerton Fund Management expects the authorities to widen the yuan's band "in the near future", Singapore-based head of fixed-income Patrick Yeo said on Wednesday. "There have been bets that China will soon widen the trading band as part of its exchange-rate reforms," said Daniel Chan, Hong Kong-based executive vice president at Glory Sky Global Markets.
The yuan rose 0.6 per cent against the dollar this month and was little changed for the week, according to China Foreign Exchange Trade System prices. The currency weakened 0.01 per cent yesterday to 6.1313 per dollar. The spot rate is allowed to trade a maximum 1 per cent on either side of the fixing.
The currency touched 6.1210 on May 27, the strongest level since the government unified official and market exchange rates at the end of 1993.
The International Monetary Fund this week lowered its growth estimate for the mainland to 7.75 per cent for this year and the next, from 8 per cent and 8.2 per cent, respectively. China's Purchasing Manager Index was 50 in May, compared with 50.6 in April, according to the median estimate in a survey ahead of official data due today. A preliminary reading by HSBC and Markit's Purchasing Managers Index last week was 49.6, below the 50 level that divides expansion and contraction.
"Yuan gains may slow if the economic data surprises the market on the downside as a strong exchange-rate could hurt the exporters," said Chan.
In Hong Kong, the offshore yuan fell 0.32 per cent this week, the first decline in nine weeks. The spot was down 0.11 per cent at 6.1408 per US dollar yesterday and gained 0.4 per cent in May.
Twelve-month non-deliverable forwards slid 0.5 per cent this week, the biggest fall in a year. The contracts traded at 6.2557 per US dollar today, a 2 per cent discount to the onshore spot rate.
One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, jumped 50 basis points, or 0.50 percentage point, to 1.98 per cent in May. The gauge dropped seven basis points this week.