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MARKETS CURRENCIES FOREIGN EXCHANGE
Yuan Rise Is Sign of China Policy Success
Government wanted to display image of stability during legislative
By SHEN HONG
March 13, 2016 11:19 p.m. ET
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SHANGHAI—China’s push to dispel concerns about the strength of its currency appears to be bearing fruit.
The yuan has ratcheted up strong gains in the past two weeks, hitting its strongest level against the dollar in less than a month in the domestic market and surging to a high unseen since early December in the more freely traded offshore market Friday.
The rally started on March 2, the eve of a two-week-long annual session of China’s legislative body and reached its climax Friday, the day before the country’s central banker took pains to fend off worries about yuan depreciation at a news conference.
“The currency’s recent strength is to a large extent due to the government’s intention to preserve an image of financial stability during the legislative meetings,” said Chaoping Zhu, economist at UOB Kay Hian Holdings, a Singapore-based brokerage.
The dollar fell to 6.4943 yuan on Monday morning Asia time, down from 6.4985 yuan at Friday’s close. The yuan hit as high as 6.4866 during intraday trading Friday, its strongest showing against the U.S. currency since Feb. 15.
In the offshore market where the yuan is unrestricted by a trading band imposed by the central bank domestically, it reached 6.4910 against the dollar on Monday morning in Asia, paring gains from Friday’s high of 6.4821, which represented a fresh peak level since Dec. 8.
The yuan’s slight retreat from the recent highs came after the People’s Bank of China set the dollar-yuan central parity, a reference exchange rate it uses to guide the currency’s direction, at 6.4913 on Monday, up from 6.4905 on Friday.
“The central bank is taking a breather today, after using the reference rate to push the yuan higher and higher in the past two weeks,” said a Shanghai-based foreign-exchange trader at a midsize local bank.
The PBOC has also been “in the market everyday,” using its agent banks, typically the nation’s largest commercial lenders, to buy the yuan against the dollar to dissolve downward pressures on the Chinese currency, the trader added.
On Saturday, PBOC Gov. Zhou Xiaochuan told reporters he expects a gradual “return to normalcy’ in the yuan’s exchange rate in the wake of the currency’s sharp selloffs early this year.
Mr. Zhou said recent pressure weakening the yuan, also known as the renminbi, mainly came from uncertainty over China’s economy, bouts of turbulence in China’s financial markets and the divergent monetary policies pursued by central banks around the world.
“I can’t rule out any future fluctuations” in the exchange rate, Mr. Zhou said. “But the current trend is a return to normalcy and rationality.”
Thanks to its recent rally, the yuan is now largely flat against the dollar since the beginning of this year, after depreciating by as much as 1.5% earlier this year, when a weak economy and rapid capital outflows intensified pessimism about China’s currency.
However, given the largely political nature of the yuan’s latest surge, doubts remain on how long it can preserve its recent gains.
“If the government fails to boost economic growth, the yuan will surely come under pressure down the road, especially toward the year’s end,” said UOB’s Mr. Zhu.
Alongside the yuan, currencies of countries in the Association of South-East Asian Nations, such as the Thai baht, Indonesian rupiah and Malaysian ringgit, have strengthened against the U.S. dollar during the past week, outperforming other emerging-market counterparts in Latin America and Eastern Europe.
”We are now more confident that Asean currencies have already seen the worst,” analysts from HSBC wrote in a research report Friday.
—Gregor Stuart Hunter
contributed to this article.
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