The yuan advanced to a 17-year high on speculation China will favor currency gains as part of efforts to tame the fastest inflation since 2008.
The People’s Bank of China set the reference rate for yuan trading 0.1 percent stronger at 6.3883 per dollar today, the strongest level since July 2005. The central bank broadened the base of reserves it requires commercial lenders to deposit with it to control liquidity, economists said late last week. Fighting inflation will remain the top priority in the second half of 2011 and monetary policy will remain “prudent,” the central bank said in a quarterly report on Aug. 12.
“The latest move on banks’ reserves confirms the fact that China will continue to tighten monetary policy to ease inflationary pressure,” said Daniel Chan, Hong Kong-based economist at BWC Capital Markets. “It also implies the government is going to allow a stronger currency to lower imported food and material costs.”
The yuan strengthened 0.09 percent to close at 6.3810 per dollar as of 4:30 p.m. in Shanghai, according to the China Foreign Exchange Trade System. The currency touched 6.3801 earlier, the strongest level since the country unified the official and market exchange rates at the end of 1993. In Hong Kong’s offshore market, the currency rose 0.13 percent to 6.3663.
The yuan will become a “major force” as a reserve currency in five years, Mark Mobius, who oversees about $50 billion as executive chairman of Templeton Asset Management’s emerging markets group, said in Hong Kong today. The government will accelerate efforts to boost the usage of the currency beyond the nation’s borders, he said.
Twelve-month non-deliverable forwards gained 0.13 percent to 6.2847 in Hong Kong, a 1.5 percent premium to the onshore spot rate, according to data compiled by Bloomberg.
Reserve requirements are being extended to customers’ margin deposits, a move that may drain 900 billion yuan ($141 billion) from the banking system over six months, Bank of America Merrill Lynch economist Lu Ting said in an e-mailed note on Aug. 26. Mizuho Securities Asia Ltd. cited similar information.
China has already raised the reserve-requirement ratio for the nation’s major lenders six times this year, lifting the measure to a record 21.5 percent. Consumer prices climbed 6.5 percent from a year earlier in July, the most in three years.