The yuan may rise by a further 6.7 per cent by the end of the year, faster than market expectations, according to the Hong Kong Monetary Authority.
Hong Kong's de facto central bank made the forecast yesterday when it said local lenders could spend as much as 75 per cent of their yuan deposits to invest in yuan-denominated bonds in the city.
HKMA said in its quarterly report that it expected the yuan to appreciate to between 7.42 and 7.11 against the US dollar by the year's end, based on the currency being depegged in July 2005. This is compared with some analysts' estimates of as much as 7.20.
The yuan ended at 7.6188 to the US dollar yesterday, down from 7.618 on the previous close. It hit a record of 7.6155 during Wednesday trade.
HKMA chief executive Joseph Yam Chi-kwong yesterday said depositors with yuan and banks that had taken yuan deposits were allowed to invest in yuan bonds.
Banks could use as much as 75 per cent of their customers' deposits for such investments, according to a HKMA the circular.
However, Mr Yam expected the secondary market for yuan bond trading to be quiet initially given the limited amount of yuan deposits, which stood at about 25 billion yuan.