Yuan strengthens

The yuan strengthened slightly in morning trade on Monday, the eighth anniversary of the currency's revaluation, but the exchange rate remained well within its 1 percent daily trading band. There was no significant reaction in the currency or money markets to the government's decision on Friday to scrap the floor on commercial bank lending rates.
Spot yuan traded at 6.1369 versus the dollar at midday, up from 6.1379 at Friday's close. The People's Bank of China (PBOC) fixed the official daily midpoint at 6.1721 on Monday morning, with the yuan strengthening from 6.1751 at Friday's fix. Some traders said the last three digits of Monday's midpoint were intended to mark the anniversary of the yuan's revaluation on July 21, 2005. The yuan has appreciated 34.86 percent against the dollar since then.
PBOC officials have repeatedly said that the yuan has now reached its rough fair value, but foreign trading partners continue to disagree. Last week, US Federal Reserve Chairman Ben Bernanke accused China of restraining its currency in order to make its exports more competitive.
Regardless, market forces have begun playing a bigger role in pricing the yuan since the revaluation. Although the government still has the final say on the currency's value, it has steadily allowed the market more room to fluctuate, in particular by widening the intra-day trading band in 2012.
So far this year the yuan stands 1.52 percent stronger against the dollar, but there are expectations that bullish sentiment will wane due to concerns over China's export performance. A commentary published by the official Xinhua news service on Sunday defended China's gradual approach to currency reform and argued it was paying a high price for letting the yuan rise.
"The RMB exchange rate reform has been brave, as tens of thousands of low-end manufacturers operating at a low profit margin have had to take a significant loss due to a stronger RMB yuan," the commentary said, referring to the yuan by initials representing renminbi, the official name of China's currency. China posted an unexpectedly sharp 3.1 percent drop in exports in June, surprising a market that had expected 4 percent growth. The currency has been appreciating in trade-weighted terms every month since September last year.