The yuan climbed to a 19-year high on speculation China will step up efforts to arrest a seven-quarter slowdown in the world’s second-largest economy.
The currency had its biggest gain in six months after the People’s Bank of China strengthened its reference rate today by the most since Aug. 22. The central bank injected a record amount of funds into the financial system this week to address a cash squeeze ahead of a weeklong holiday that starts Oct. 1. The Shanghai Composite Index jumped 4.1 percent in the past two days, buoyed by a report suggesting policy makers plan to unveil measures to support Chinese stocks.
“Funds are flowing back into the market as people bet China will soon act more aggressively to revive growth,” said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd. “There’s always expectations that the government will announce important polices before or at the end of a long holiday. The stock market is also rallying on stimulus bets.”
The yuan gained 0.28 percent to close at 6.2849 per dollar in Shanghai, according to the China Foreign Exchange Trade System. It has strengthened 1.1 percent this quarter and today touched 6.2835, the strongest level since China unified official and market exchange rates at the end of 1993. The currency can trade as much as 1 percent on either side of the central bank’s daily fixing, which was raised 0.08 percent today to 6.3410.
Before today’s advance the yuan was headed for an annual decline versus the dollar and renewed appreciation may make Chinese currency policy less of a hot topic in the U.S., where President Barack Obama is seeking a second term in a November election.
Obama, who has said China keeps its currency weak to give its exporters an edge, touted a trade complaint against the Asian nation this month over illegally subsidizing shipment of automobiles and auto parts. Republican candidate Mitt Romney said he would on his first day in the White House tell the Treasury Department to list China as a currency manipulator, paving the way for more duties on Chinese imports. The U.S. ambassador to China, Gary Locke, said Sept. 13 the yuan “is still undervalued.”
Twelve-month non-deliverable forwards rose 0.19 percent to 6.4065 per dollar in Hong Kong, a 1.9 percent discount to the spot rate in Shanghai, according to data compiled by Bloomberg. In Hong Kong’s offshore market, the yuan gained 0.19 percent to 6.3010. The onshore exchange rate will end this year at 6.32, according to the median estimate of analysts surveyed by Bloomberg.
“The yuan forwards are strengthening as the onshore spot rose to a record high, which took some investors by surprise,” said Banny Lam, a Hong Kong-based chief economist at CCB International Securities Ltd., a unit of China’s second-largest bank by market value. “Those investors might have to terminate some short positions,” he said, referring to bets China’s currency would weaken.
The yuan’s rally is being spurred by an expanding supply of dollars. The Federal Reserve announced a third round of asset purchases this month, a policy known as quantitative easing that spurs demand for higher-yielding assets beyond U.S. borders. The yield on China’s one-year government debt is 2.82 percent, compared with 0.16 percent for similar-maturity Treasuries.
The securities regulator is considering lowering taxes on stock and bond investments, China Securities Journal reported today, citing an unidentified official. Economists predict gross domestic product will increase 7.4 percent in the three months through September, according to the median estimate in a Bloomberg survey, and that would be the smallest gain since March 2009. Growth slowed in each of the previous six quarters.
“The economy is not doing so well and the government will implement new stimulus although the scale won’t be as large as before due to concerns about some bubbles in the property market,” said Bruce Yam, a foreign-exchange strategist at Sun Hung Kai Financial Ltd. “The yuan will find it difficult to strengthen beyond 6.25 in the final quarter.”