UpdateStrengthening yuan signals more currency flexibility on the way
Appreciation to record level yesterday to dent competitiveness of exports as growth slows
The yuan rose to its strongest level against the US dollar in nearly two decades yesterday, highlighting Beijing's determination to roll out more reforms to make its currency more flexible despite the short-term headwinds to exports.
The renminbi has been trading near the upper limit of its daily trading band from February till June this year. Since June, the gap between the spot rate and the daily reference rate - which is set by the central bank as the middle point of the permissible trading band - has narrowed as expectations of yuan appreciation cooled following disappointing economic data from Beijing.
China has a domestic crisis now. The regulators want to hold money in the country … to prevent capital flight
But since late last month, the currency regained upward momentum as the government kept setting a stronger daily reference rate, at odds with data signalling a further slowdown that would logically prompt a weakening of the currency.
The yuan closed at 6.1192 against the US dollar in Shanghai yesterday, marking the strongest level since the end of 1993. That was again near the top of the 1 per cent range in which the currency is allowed to deviate from the daily reference rate.
Economists, however, said room for yuan appreciation from the current level was limited in the second half of this year and into 2014 as Beijing battled to keep economic growth around the 7.5 per cent mark - no mean feat given the relative loss of currency competitiveness seen since 2005 when the yuan's peg to the dollar was broken. It has strengthened by more than 30 per cent since and has gained 1.8 per cent so far this year.
