The yuan reached a record high yesterday as the central bank fixed its midpoint against the US dollar at the strongest level ever.
That sparked anticipation of further appreciation this year and stoked inflationary pressure on the mainland and Hong Kong.
The People's Bank of China set the midpoint at 6.2506 yuan per US dollar - up from the fixing of 6.2578 on Thursday - ahead of a visit by US Secretary of State John Kerry to Asia. The yuan jumped to 79.775 Hong Kong dollars per 100 yuan, just near the record of 79.729 on Wednesday.
China often allows the yuan to appreciate faster before visits by officials from Western countries, who usually push for exchange rate liberalisation.
However, the yuan is set to strengthen this year. Inflows of capital are expected to generate higher demand for the yuan than last year as the mainland economy recovers, economists said.
"In 2013 we'll see greater risks of capital inflows to China, rather than two-way movements in the yuan exchange rate or capital outflows as last year," said Chang Jian, an economist at Barclays Capital. Barclays expects the yuan to strengthen 2 per cent against the greenback this year, after considering China's intention to protect exporters in the still shaky economic recovery.
The yuan rate in the spot market touched 6.1903 per dollar yesterday, the highest since 1994. The yuan spot rate has risen 0.6 per cent so far this year, after hitting highs in the past couple of weeks.
Economists at Standard Chartered forecast the spot rate for yuan would reach 6.18 by the end of June and 6.10 by the end of this year. They said China was unlikely to follow Japan in depreciating its currency, as Japanese exporters are not its major competitors.
Nathan Chow, a DBS Bank economist, expects the strengthening of the yuan to continue to put pressure on inflation in Hong Kong because the city's currency is pegged to the US dollar.
"The inflationary pressure caused by the yuan appreciation is inevitable, as Hong Kong imports a variety of goods, such as food and medical supplies, from the mainland," Chow said.
A 1 per cent rise in the yuan would result in a 0.05 percentage point increase in Hong Kong's consumer inflation, the Monetary Authority says.