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Yuan gains strength against US dollar

China's currency closed higher against the US dollar on the second trading day after the country last Thursday let the yuan rise for the first time in a decade.

The yuan was fixed at today's closing rate of 8.1097 per dollar as of 3:30pm on the Foreign Exchange Trading System, according to the State Administration of Foreign Exchange's Web site. The currency was fixed at 8.1111 on Friday.

Under its new currency regime, the People's Bank of China allowed the yuan to gain 2.1 percent to 8.11 on July 21, ending the peg of 8.3 introduced in 1995.

The central bank sets the fixing price of the yuan, which then becomes the mid-rate for trading on the next working day. It allows a daily movement of 0.3 percent either side of the rate.

"In the near term, the pressure is for the yuan to increase in value against other currencies," said Michael Thomas, an economist and fixed-income strategist in Sydney at ICAP Australia Ltd. "The strength of the Chinese economy and the strength of the Chinese trade balance argue strongly for a stronger currency."

China's growth unexpectedly picked up in the second quarter as exports surged and investment gathered pace. The economy expanded 9.5 percent from a year earlier, the National Bureau of Statistics said on July 20, beating the median 9.2 percent gain forecast in a Bloomberg survey.

China's trade surplus reached US$39.6 billion in the first half, surpassing the US$32 billion reported for last year, the commerce ministry reported on July 11.

The yuan today closed at 9.8660 per euro, from 10.0141 on July 22, at 0.072440 against the yen, from 0.073059, and at 1.0425 against the Hong Kong dollar, from 1.048.

China's currency would rise to 7.7275 against the dollar in a year if freely traded, a gain of 4.9 percent from today's closing price, according to forward contracts. The contracts allow investors to bet on the value of a currency that isn't fully convertible or hedge investments denominated in it.

China's exports may decline if the yuan appreciates by more than 5 percent, Huo Jianguo, deputy head of the foreign trade department, said on Sunday.

"According to our calculations, under the current foreign-trade situation, an appreciation by 5 percent or less is affordable to export growth," Huo said. "The government must take into consideration trade growth when deciding the appreciation margin this year." In the first half, total export volume accounted for more than 40 percent of the nation's gross domestic product, Wu Xiaoling (吳曉靈), vice central bank governor, said on Saturday.

China won't make its currency fully convertible for at least five years because it worries hedge funds may force the yuan to plunge, Li Deshui, a member of the central bank's monetary committee, said in an interview in Beijing on July 22.

"There's more than US$800 billion to US$1 trillion of hedge funds in the world and the Chinese financial system is relatively weak," Li said. "If the [yuan] becomes fully convertible it would be attacked by these hedge funds."

Li, one of 13 members of the monetary policy committee and also commissioner of China's National Bureau of Statistics, said the state of the country's banks is a key reason why the government won't allow the yuan to be fully tradable anytime soon.
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