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Nevin Nie

Value of the mainland currency officially surpasses that of the city's  for the first  time in 13 years

The value of the yuan officially surpassed the Hong Kong dollar yesterday for the first time in 13 years, a day after Beijing announced a record high trade surplus.

Traders believe the rise of the yuan was related to the announcement on Wednesday that the full-year trade surplus jumped 74 per cent last year to US$177.47 billion, adding pressure on the central government to revalue the currency.

It came as the mainland's stock market capitalisation topped US$1 trillion for the first time yesterday.

The value of shares on the Shanghai and Shenzhen stock exchanges more than tripled in the past year, reaching US$1.01 trillion as of yesterday's close, according to data compiled by Bloomberg.

The yuan closed at 7.7949 to the US dollar, up 1.56 per cent from the previous close,  pushing it to  0.9996 to the Hong Kong dollar yesterday.

The yuan's rise fuelled concern that this would lead to inflation being imported to Hong Kong as much of the city's food and other goods come from the mainland.

It also raised questions as to whether the city would scrap the peg that has held the exchange rate of the Hong Kong currency at 7.8 to the US dollar since 1983.

However, Financial Secretary Henry Tang Ying-yen and Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong have repeatedly said the peg will remain and that the yuan's appreciation would have only a psychological impact on the market.

A Monetary Authority spokesman said the yuan breach of the 7.8 level against the US dollar had been widely anticipated by the market.

'The market remained stable yesterday,' he said.

The China Foreign Exchange Trade System, the mainland's foreign exchange centre, quoted the mid-price of 7.7977 against the US dollar and 1.0004 Hong Kong dollars for one yuan.

The yuan last reached parity, briefly, with the Hong Kong dollar on the grey market in 1993.  Yesterday's rate was the highest since 1994, when the yuan switched to a quasi-fixed regime.

Most economists also expect the peg will remain unchanged. 'There is little to be gained from such a move,' said Glenn Maguire, Societe Generale's chief Asian economist.

Daniel Chan Po-ming, a senior investment strategist at DBS Bank (Hong Kong), pointed out that the yuan had been much stronger in the late 1980s. He agreed that it was not appropriate to change the US dollar peg or to link the Hong Kong dollar to the yuan, as the mainland currency was not fully convertible.

'There would be more of a negative impact than a positive impact' from such moves, Mr Chan said.

Mr Maguire expects the yuan to strengthen to 7.2 against the US dollar by the end of this year, which would mean a cumulative depreciation of about 15 per cent of the Hong Kong dollar against the yuan.

The mainland currency rose 3.3 per cent in 2006 and 5.7 per cent since the revaluation in July 2005.

Most market watchers expected the yuan to appreciate a further 3 to 5 per cent this year.

Bank of East Asia chairman David Li Kwok-po said  yesterday it would be possible for the yuan to rise about 5 to 6 per cent against the US dollar. 'Definitely if you asked whether the yuan would rise 10 per cent, I will say no. However, if you say a 5 or 6 per cent increase, I will say this is possible,' he said.

Nicholas Kwan Ka-ming, regional head of research at Standard Chartered Bank, said even if the yuan rose 10 per cent this year, the impact on Hong Kong would be minimal because imported goods accounted for a small percentage of the consumer price index. 'But it could create some concern on confidence, as an unexpected sharp rise of the yuan might hint at some important change of policy, either good or bad,' he said.

Mr Chan warned that if the yuan continued to appreciate and attract more capital into the Hong Kong market, there could be the danger of creating an asset bubble.



Yuan moves ahead of HK dollar