The yuan on Monday scored its second biggest daily gain against the dollar since it was revalued in July 2005, as the central bank allowed it to rise at a faster pace and Chinese banks sold dollars after a ban on them quoting offshore non-deliverable forwards (NDFs), dealers said.
The yuan hit a post-revaluation high for the third straight trading day after the central bank set a record high mid-point for the Chinese currency. The yuan closed at 7.8738 to the dollar, gaining 0.20 percent from Friday's close of 7.8896, its second biggest rise since Beijing revalued the yuan by 2.1 percent and depegged it from the US currency in July 2005.
The largest gain since the revaluation was 0.25 percent on August 17. In intraday trading on Monday, the yuan hit 7.8737, the highest level since the policy change. The previous intraday high was 7.8870, reached on Friday.
The yuan has now risen 0.88 percent since September 15 when its gains began to pick up pace, meaning it has been appreciating at an annual rate of more than 7 percent during the past six weeks.
That compares with a total gain of 2.50 percent since the start of this year, an annual rate of 3 percent. "The central bank has apparently loosened its grip on the yuan's gains over the past six weeks or so, due mainly to heavy pressure from excess liquidity in the banking system," said a dealer at a major Chinese bank.
The People's Bank of China, which has bought most dollars flowing into China through the country's heavy trade surpluses to help stabilise the yuan and so pumped huge liquidity into the market, set the yuan's mid-point at a much stronger 8.8781 to the dollar on Monday morning, up from Friday's mid-point of 7.8871.
It was the third straight day that the central bank had set the yuan's mid-point at its highest level since the revaluation.
Chinese banks had also helped push up the yuan of late. "We saw some Chinese banks short dollars on the domestic market after they were banned to trade offshore NDFs last week," said a Shanghai-based dealer at a European bank.
"Many of them had longed dollars on the offshore NDF market and the ban forced them to return to the domestic market to offset some overseas long positions," she said.
China's foreign exchange regulator last Thursday ordered domestic banks not to quote prices for offshore NDFs, a move designed to prevent banks from risking losses, and to protect Chinese authorities' ability to control yuan exchange rates.
One-year offshore NDFs quoted the yuan at 7.6063/7.6163 to the dollar on Monday, expecting a yuan rise between 3.44 and 3.57 percent, from Friday's 3.44/3.48 percent, indicating strengthened yuan appreciation expectations.
Dealers said the latest quickened pace of appreciation would help the yuan to catch up with its slower-than-expected gains earlier this year. The yuan was now set to rise at least 3 percent and possibly as high as 3.5 percent, for all of 2006.
"The resistance at 7.8 (to the dollar) is not unlikely to be tested this year, though the central bank could also control its gains to around 7.83," said a Shanghai dealer at a US bank.