The yuan finished at its strongest level in four-months on Wednesday, underpinned by a firmer outlook for the Chinese economy and as the dollar eased against major currencies. Spot yuan closed at 6.8255 versus the dollar on Wednesday, up slightly from Tuesday's finish of 6.8267, and the highest close since December 31.
Earlier in the day, the Chinese central bank set the yuan's daily mid-point at 6.8265, up from Tuesday's reference rate of 6.8274. Dealers said the mid-point, while reflecting the dollar's weakness on global markets, also indicated that the People's Bank of China was sticking to recent tactics to allow the yuan to appreciate slightly adopted since late last week.
"The central bank appears to be maintaining its new tactics, so the yuan should have the potential to rise slightly further," said a dealer at a Japanese bank in Shanghai, adding that the yuan was likely to rise as high as 6.8200 in the near term. The yuan has not been affected by gyrations in overseas equity markets on worries linked to the swine flu in Mexico, which tempered demand for risky assets.
The yuan mainly takes its cue from the Chinese central bank's policy moves and dollar movements on global markets. Reflecting confidence in a possible earlier-than-expected economic recovery, propelled by China's strong bank lending and fixed asset investment, the central bank for the first time last week pushed the yuan's mid-point well beyond the firmer end of the 6.8300 to 6.8399 range it had maintained since mid-December.
The official China Securities Journal said in a report on Wednesday that the yuan's unexpected rise over the past week might indicate China would allow the yuan to appreciate slightly in the short term, but it added that the Chinese currency's rise for the rest of this year might still be limited. The limit to the upside was partly attributable to weak exports and foreign direct investment, which have also made many Chinese officials wary of predicting a quick, full economic recovery.
In the latest comments that reflect such caution, a top Chinese official said on Tuesday that China could not turn around its export-driven economy in isolation, and needed improvement in the rest of the world, especially the United States.
Aggressive monetary and fiscal policies put in place over the past few months were "effective" in supporting China's economy but the "current improvement is not solid," said Chinese minister of commerce, Chen Deming, in the United States. Also, China's top banking regulator warned banks against risks from a surge in new lending and urged them to step up oversight, the official Financial News reported on Wednesday.
Chinese banks extended 4.58 trillion yuan ($671 billion) in new loans in the first quarter, a record rise which eclipsed all forecasts and has aroused concerns that balance sheets could be weighed down by non-performing debt in coming years. Offshore one-year dollar/yuan non-deliverable forwards (NDFs) was bid at 6.7690 on Wednesday against Tuesday's close of 6.7850.