Mon, 14 Oct 02:38:00 GMT
By Pete Sweeney
SHANGHAI, Oct 14 (Reuters) - China's central bank set the yuan's official guidance rate at a record high on Monday morning, shrugging off a weaker-than-expected monthly exports in September.
The People's Bank of China (PBOC) fixed the yuan midpoint -- the rate from which the traded rate is allowed to diverge by 1 percent in either direction -- at 6.1406 per dollar at the market open, the highest it has been since China created its domestic foreign exchange market in 1994.
China's exports dropped 0.3 percent in September from a year earlier, data showed on Satursday, sharply confounding market expectations for a rise of 6 percent, and marking the worst performance in three months. [ID:nL4N0I202X]
A similar surprise dip occurred in June, and economists suggested that the yuan's strength was in part to blame, especially given the massive declines posted by currencies of most other Asian countries, most notably the Japanese yen .
The yuan's nominal exchange rate is up 1.85 percent so far this year; the currency has also risen in trade-weighted terms every month since Sept 2012 until it finally declined slightly in August, according to date from the Bank for International Settlements (BIS). BIS data for September should be released later this week.
The PBOC's policy toward the exchange rate has become increasingly controversial this year as it has pitted the short-term interests of Chinese exporters, who credit themselves with driving much of China's real economic growth, against the wider long-term national interest in economic restructuring.
"Practically speaking, domestic businesses don't hope for more rises to the yuan, because exports are still really weak, and if it keeps rising the results could be really ugly," said a forex trader at a European bank in Shanghai.
"But in terms of the internationalisation of the yuan, you can't devalue it either," he added.
Chinese reformers see a stronger yuan as key to migrating China to an economic model focused on producing more higher-quality goods and selling them to domestic consumers, instead of churning out low-grade products that compete primarily on price.
A stronger domestic currency would also reduce the need for China to maintain its massive dollar reserves, a byproduct of PBOC interventions conducted to hold down the yuan's exchange rate.
This policy has come under increasing criticism as the dollar has slid in relative value thanks to systematic monetary easing by the U.S. Fed, and at the same time confidence in the U.S. political system's commitment to its outstanding debt obligations has waned as the ongoing budget impasse drags on.
On the other hand, China's economic restructuring is not yet complete, and export-focused businesses remain major employers.
The spot yuan did not take advantage of the new space to trade at a record high, instead remaining relatively flat in morning trade, as it has since mid-August. The spot rate opened at 6.1165 to the dollar versus the previous close of 6.1206.
(Additional reporting by Chen Yixin; Editing by Kim Coghill)