Central bank swift to quash buying frenzy amid speculation over policy change
Chatter about an impending change in China's currency policy hit fever-pitch yesterday as buying pressure pushed the yuan briefly to its strongest in years on the Shanghai market.
The short-lived lunchtime run-up in the currency prompted swift intervention from the central bank and a hasty denial that there had been any change in policy. Even so, some pundits took the fleeting move as a taste of things to come, forecasting that Beijing will switch from its exchange rate peg to the US dollar to a managed float against a basket of currencies as early as next week.
Although any initial move in the yuan's exchange rate following a policy change is likely to be small, unprecedented levels of speculator and investor interest mean that even a yuan appreciation of 3 per cent to 5 per cent will have a significant impact on financial markets and economies across East Asia.
Yesterday, the People's Bank of China denied any policy change was imminent. Last weekend, however, bank governor Zhou Xiaochuan said China might need to speed up reform, and a front-page commentary in the China Securities Journal said preparations for a change of exchange rate policy were now in place.
That article was partly responsible for a flurry of yuan buying in thin trade before next week's mainland holiday, which pushed the exchange rate to as low as 8.27 yuan to the US dollar. That is the strongest level the yuan has hit since its 33 per cent devaluation in 1994.