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Yuan hits a record high level against US dollar
2011/12/28

The yuan hit a record high against the US dollar on Monday on the back of much stronger volatility this month.

The Chinese currency gained for a second straight day, reaching a record of 6.3287 in morning trading, after the central bank guided the currency stronger via its daily reference exchange rate, set 0.07 percent higher at 6.3167 per dollar.

The new high, analysts said, underscored the yuan's new, market-oriented pattern of movement against the dollar.

Previously, the yuan had appreciated almost unilaterally against the dollar, but the currency has recently become more volatile, posting two-way fluctuations.

This month, the yuan touched the bottom of the daily trading range of 0.5 percent on 12 out of the month's 18 trading days. The currency also posted a record one-day gain of 0.4 percent on Dec 16.

"Clearly, the yuan has become more volatile, and it is a good thing," said Wang Jianhui, chief economist with Southwest Securities Co Ltd.

"It's what the exchange rate should be under a real market-oriented exchange rate formation system, which the central government has vowed to build."

In a research note this month, Australia and New Zealand Banking Group Ltd said it expected the Chinese central bank to expand the yuan's daily fluctuation range against the dollar as early as January to make the exchange rate more market-based.

A market-oriented exchange rate, said Wang, is also a prerequisite for the internationalization of the yuan.

China has been gradually changing its foreign-exchange regime and opening up its capital accounts to enable the yuan to take its place alongside the dollar, euro and yen as a fully convertible reserve currency.

That effort moved forward on Monday, when China and Japan reached a package of currency agreements as Japanese Prime Minister Yoshihiko Noda ended his two-day visit to China.

The two nations agreed to promote direct trading of the yen and yuan without requiring an intermediate conversion into dollars. China is Japan's biggest trading partner with 26.5 trillion yen ($340 billion) in bilateral transactions last year. About 60 percent of all Japan-China trade is settled in dollars.

Japan will also start buying Chinese national debt and encouraging its companies to issue more yuan-denominated bonds offshore.

Many of the issues are likely to be in Hong Kong, where the market for yuan-denominated bonds, or dim sum bonds, flourished this year, following the country's push to internationalize its currency.

 

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