China's yuan strengthened against the dollar on Wednesday amid more appeals for a faster appreciation of the currency to help cool the country's racing economy.
The yuan closed at 7.9847 to the dollar, up from Tuesday's close of 7.9872, after the People's Bank of China set the mid-point of the yuan's exchange rate at 7.9877 on Wednesday morning, down from a 7.9870 mid-point on Tuesday.
The yuan has weakened slightly so far this week from Friday's peak of 7.9815. Friday's level was the highest since Beijing revalued the yuan by 2.1 percent and depegged it from the dollar a year ago. It has now gained a further 1.57 percent since the policy change.
"There is a consensus that the yuan may appreciate faster in coming months, though the PBOC will still set the pace of how fast it could rise," said a dealer at a European bank.
"The consensus is built on the status quo of China's economy and mounting calls for a faster yuan appreciation." Indeed, a growing number of economists are urging Beijing to free its currency from an artificial stability, after economic indicators announced a week ago pointed to a racing economy on all fronts including a record trade surplus in June.
Yuan appreciation will be the most effective cooling step among other choices, including bill issuance by the central bank, hikes in bank reserve requirements and interest rates or administrative steps like "window guidance", economists said.
Dealers said they believed the central bank was aware of the situation, but it might worry about side effects like losing jobs in labour-intensive export industries such as textiles. They said the yuan might move narrowly for another few days, but it could breach 7.9800 next week to maintain continued strength in the medium term.