China officials talk down buoyant yuan as basket hits 5-year high

SHANGHAI: China's yuan climbed to a five-year top against a trade-weighted basket of currencies on Monday, exerting pressure on the country's exporters, even as officials continued to warn against excessive speculation.

Former foreign exchange regulator Guan Tao joined a slew of current and former Chinese officials cautioning against speculative yuan trade in a commentary in the official China Securities Journal.

"Recently, there are rising signs of cyclical 'herding' in the domestic forex market," Guan, a former senior official at the State Administration of Foreign Exchange (SAFE), wrote. Expectations of persistent yuan strength "not only harm the orderly operation of the forex market, but also increase the financial burden of the exporting sector."

Guan's comments come after a former central bank official told the official Xinhua news agency that the yuan may have overshot in its rapid appreciation against the US dollar, and that the rise is not sustainable.

The central bank-backed Financial News also warned of possible factors that could lead the yuan to weaken against the dollar, and regulators said last week they will crack down on forex market manipulation, while reiterating that China's currency policy will remain unchanged.

The string of official comments come after the yuan recorded its best weekly performance against the dollar since November last week, though signs of concern over strong one-way bets on the currency have slowed the rally.

On Monday, the People's Bank of China (PBOC) lifted the yuan midpoint to a three-year high. It set guidance at 6.3682 per dollar prior to market open, 176 pips firmer than Friday and the strongest since May 17, 2018.

The firmer fixing also pushed the trade-weighted yuan basket index up to 98.22, the firmest since March 29, 2016. Market players have widely viewed the 98 mark as the basket's ceiling, as levels above that are seen to pose a disadvantage for the yuan versus its trading partners.

Spot yuan rose to a top of 6.3611 per dollar on Monday morning, its strongest since May 18, 2018, before giving back some gains to trade at 6.3627, up 47 pips on the day.

Offshore yuan strengthened to 6.3565 per dollar, its firmest since May 23, 2018, and was last changing hands at 6.3585.

"For banks' proprietary trade, traders are paying attention to the official comments and attitude while also monitoring state bank actions," said a chief trader at a foreign bank in Shanghai.

He said the yuan's rise could face some resistance as overseas corporates buy dollars to make upcoming dividend payments.

"Some had purchased dollars mid-month, but these flows are not over yet. Some companies are monitoring the market and waiting for better prices."

Iris Pang, chief China economist at ING in Hong Kong, said in a note that yuan uncertainty presents a headache for companies, but that warnings from the PBOC about volatility should not be ignored.

"We believe that the PBOC is experimenting how much volatility the market can endure, and how behavior of market participants can move the yuan. The PBOC could use window guidance to (financial institutions) not to speculate on yuan direction," Pang told Reuters.