Yuan hits record high, fuels talk of "mini-revaluation"
By Lu Jianxin and Jacqueline Wong
SHANGHAI | Tue Aug 16, 2011 10:48am IST
(Reuters) - The yuan hit an all-time trading peak against the dollar on Tuesday as the People's Bank of China fixed its reference rate at a new high for the fifth straight day, a sign Beijing may be engineering a "mini-revaluation" of the Chinese currency, traders said.
Chinese opinion toward a stronger yuan has dramatically changed since a political struggle in the United States threatened to cause a U.S. debt default end of July, followed by a downgrade of the U.S. credit rating by Standard and Poor's.
China is the United States' biggest creditor, holding $1.16 trillion in U.S. Treasuries. The U.S. debt saga has raised an outcry in China for the government to diversify its huge dollar assets and to shift from a de facto peg in which the yuan's rate versus other currencies still depends on the dollar.
The official China Securities Journal said in a front-page editorial on Tuesday that the time "is ripe" for China to widen the yuan's trading band versus the dollar, which will pave the way for a more flexible yuan exchange rate.
The appeal came after a group of official newspapers, including the Journal, forecast last week that the yuan would rise more rapidly to the dollar in coming months as it took on a bigger role in Beijing's suite of economic policy tools.
"The Chinese have grown to become uneasy about the dollar and dollar assets," said a trader at a Chinese state-owned bank in Beijing.
"A consensus is being built up among them that China needs to let the yuan appreciate no matter what cost it has to pay."
Spot yuan was trading at an all-time high of 6.3854 per dollar at midday, up from Monday's close of 6.3904 and toppling the previous peak of 6.3890 touched last Friday.
It has now appreciated 6.90 percent since it was depegged from the dollar in June 2010 and 3.19 percent so far this year.
MORE POLICY EVOLUTION EXPECTED
The PBOC surprised the market last week by letting the yuan rise at its fastest weekly pace since the global financial crisis in 2008, sparking speculation that China might widen the yuan's trading band, use the currency as a key tool to fight inflation or let it appreciate versus a trade-weighted basket.
On Tuesday, the central bank fixed the mid-point at another record high of 6.3925, up from Monday's historical high of 6.3950, although some traders noted the fixing came after a weakening of the dollar in global markets.
"The PBOC appears to be engineering a mini-revaluation for the yuan, although the rise this time appears not related to U.S. pressure," said a trader at a European bank in Shanghai.
U.S. Vice President Joe Biden will press China to revalue the yuan during his meetings with top Chinese officials in his visit to Beijing this week, a U.S. official said on Monday.
U.S. Treasury Under Secretary for International Affairs Lael Brainard said China's currency remained undervalued but progress had been made.
Dealers now believe the yuan may soon begin to rise against a range of major global currencies, not just the dollar, a direction that China's currency policy will logically shift toward amid a weakening in major global economies.
The change will enable China to move closer to managing its currency more independently instead of tracking the performance of the U.S. currency, and also s the world's second-largest economy expands its presences on the international stage.
More than a year after China scrapped the yuan's fixed peg to the dollar in June 2010, after pegging it during the global financial crisis from mid-2008, the government still focuses on managing the yuan against the dollar -- a de facto peg in which the yuan's rate versus other currencies depends on the dollar.
This policy lets the PBOC engineer a controlled rise of the yuan against the dollar, but at the expense of falls in the yuan against other currencies such as the euro despite China's big trade surplus with the world.
While the yuan has risen nearly 7 percent since the depegging, its nominal effective exchange rate (NEER), or its value against a trade-weighted basket, dropped 4.55
percent since June 2010, according to latest figures from the Bank for International Settlements published late on Monday.
Its real effective exchange rate (REER), which takes into account the inflation of China and its trader partners, also fell 2.28 percent during the same period, the BIS data showed.
By Lu Jianxin and Jacqueline Wong
SHANGHAI | Tue Aug 16, 2011 10:48am IST
(Reuters) - The yuan hit an all-time trading peak against the dollar on Tuesday as the People's Bank of China fixed its reference rate at a new high for the fifth straight day, a sign Beijing may be engineering a "mini-revaluation" of the Chinese currency, traders said.
Chinese opinion toward a stronger yuan has dramatically changed since a political struggle in the United States threatened to cause a U.S. debt default end of July, followed by a downgrade of the U.S. credit rating by Standard and Poor's.
China is the United States' biggest creditor, holding $1.16 trillion in U.S. Treasuries. The U.S. debt saga has raised an outcry in China for the government to diversify its huge dollar assets and to shift from a de facto peg in which the yuan's rate versus other currencies still depends on the dollar.
The official China Securities Journal said in a front-page editorial on Tuesday that the time "is ripe" for China to widen the yuan's trading band versus the dollar, which will pave the way for a more flexible yuan exchange rate.
The appeal came after a group of official newspapers, including the Journal, forecast last week that the yuan would rise more rapidly to the dollar in coming months as it took on a bigger role in Beijing's suite of economic policy tools.
"The Chinese have grown to become uneasy about the dollar and dollar assets," said a trader at a Chinese state-owned bank in Beijing.
"A consensus is being built up among them that China needs to let the yuan appreciate no matter what cost it has to pay."
Spot yuan was trading at an all-time high of 6.3854 per dollar at midday, up from Monday's close of 6.3904 and toppling the previous peak of 6.3890 touched last Friday.
It has now appreciated 6.90 percent since it was depegged from the dollar in June 2010 and 3.19 percent so far this year.
MORE POLICY EVOLUTION EXPECTED
The PBOC surprised the market last week by letting the yuan rise at its fastest weekly pace since the global financial crisis in 2008, sparking speculation that China might widen the yuan's trading band, use the currency as a key tool to fight inflation or let it appreciate versus a trade-weighted basket.
On Tuesday, the central bank fixed the mid-point at another record high of 6.3925, up from Monday's historical high of 6.3950, although some traders noted the fixing came after a weakening of the dollar in global markets.
"The PBOC appears to be engineering a mini-revaluation for the yuan, although the rise this time appears not related to U.S. pressure," said a trader at a European bank in Shanghai.
U.S. Vice President Joe Biden will press China to revalue the yuan during his meetings with top Chinese officials in his visit to Beijing this week, a U.S. official said on Monday.
U.S. Treasury Under Secretary for International Affairs Lael Brainard said China's currency remained undervalued but progress had been made.
Dealers now believe the yuan may soon begin to rise against a range of major global currencies, not just the dollar, a direction that China's currency policy will logically shift toward amid a weakening in major global economies.
The change will enable China to move closer to managing its currency more independently instead of tracking the performance of the U.S. currency, and also s the world's second-largest economy expands its presences on the international stage.
More than a year after China scrapped the yuan's fixed peg to the dollar in June 2010, after pegging it during the global financial crisis from mid-2008, the government still focuses on managing the yuan against the dollar -- a de facto peg in which the yuan's rate versus other currencies depends on the dollar.
This policy lets the PBOC engineer a controlled rise of the yuan against the dollar, but at the expense of falls in the yuan against other currencies such as the euro despite China's big trade surplus with the world.
While the yuan has risen nearly 7 percent since the depegging, its nominal effective exchange rate (NEER), or its value against a trade-weighted basket, dropped 4.55
percent since June 2010, according to latest figures from the Bank for International Settlements published late on Monday.
Its real effective exchange rate (REER), which takes into account the inflation of China and its trader partners, also fell 2.28 percent during the same period, the BIS data showed.
