The yuan ended flat against the dollar on Friday after the Chinese central bank set the local currency's mid-point only one-pip higher, brushing aside improved foreign direct investment (FDI) data for December. Yao Jian, commerce ministry spokesman, told a news conference that in December alone, China attracted $12.1 billion in FDI, up 103 percent from a year earlier.
But, in the whole of 2009, China drew $90 billion in FDI, 2.6 percent less than in the same period of 2008, That compared with a 9.9 percent fall in the first 11 months.
The PBOC set the yuan's daily mid-point against the dollar at 6.8271 on Friday from Thursday's 6.8272, showing a consistent intention to keep the yuan stable for now. Spot yuan closed at 6.8269 against the dollar, little changed from the previous close of 6.8273 and in line with the central bank's mid-point. "Although the FDI data shows China's economic conditions improving, the government still needs to protect economic recovery," said a dealer at an Asian bank in China.
"To be sure, the yuan will be permitted to rise this year, but if the yuan is to appreciate by a large amount, that may hit China's economy," he said. "So we expect China may allow the yuan to rise only 2 to 3 percent this year."
Goldman Sachs said in a research report on Friday that it believed a possible rebound in external demand and a renewed bank loan expansion in the first quarter of this year would enhance the risk of higher-than-expected inflation for China in 2010. Its economists adjusted up their consumer price index (CPI) inflation forecast to 3.5 percent for 2010 from 2.4 percent previously, and believed the peak would be reached in the third quarter of 2010 at around 4 percent year on year.
"We expect exchange rate adjustments will ultimately take a more important role in policy adjustment this time," the economists, Yu Song and Helen Qiao, said in the research.
They changed their 3-, 6-, and 12-month dollar/yuan forecasts to 6.83, 6.83, and 6.49 respectively, from 6.83, 6.83 and 6.83 previously to reflect their expectations of a 5 percent yuan appreciation against the US dollar in 12 months' time. Offshore, benchmark one-year dollar/yuan non-deliverable forwards (NDFs) rose slightly to 6.6080 bid late on Friday compared with Thursday's close of 6.6060.
Twelve-month yuan appreciation implied by NDFs fell slightly to 3.32 percent measured from the Chinese central bank's daily mid-point, compared with 3.35 percent implied at Thursday's close.