Yuan Approaches 17-Year High on Speculation Central Bank to Tolerate Gains

Aug 24, 2011 (Bloomberg) - China’s yuan advanced toward a 17- year high after the central bank set the currency’s daily fixing at the strongest level since July 2005, fueling speculation it will tolerate further gains to curb inflation.

The reference rate was set at 6.3896 per dollar, 0.14 percent stronger than yesterday. The yuan is allowed to trade up to 0.5 percent either side of the fixing, which is now 0.9 percent higher than at the end of last month. China’s consumer- price situation in the second half is “not optimistic,” according to a front-page commentary piece today in the official People’s Daily. Inflation reached 6.5 percent in July, the highest since June 2008, government data show.

“A moderate appreciation in the yuan will help ease the money inflows from the widening trade surplus,” said Liu Dongliang, a Shenzhen-based senior analyst at China Merchants Bank Co., the country’s sixth-largest lender by market value. The yuan will rise to 6.25 per dollar by the end of this year, Liu forecast.

The yuan climbed 0.13 percent to 6.3885 per dollar as of the 4:30 p.m. close in Shanghai, according to the China Foreign Exchange Trade System. It touched 6.3820 on Aug. 16, the strongest level since the country unified official and market exchange rates at the end of 1993. In Hong Kong’s offshore market, the currency was little changed at 6.3705.

A preliminary report from HSBC Holdings Plc and Markit Economics released yesterday showed the purchasing managers’ index rose to 49.8 in August, compared with 49.3 in July. The final reading is due early next month. China had a trade surplus of $31.5 billion in July, the most since January 2009, the customs bureau said on Aug. 10.

Twelve-month non-deliverable forwards dropped 0.09 percent to 6.2868, according to data compiled by Bloomberg. The premium to the onshore spot rate was 1.6 percent.