China central bank lets yuan strengthen, but not enough for market

SHANGHAI: The Chinese central bank allowed the yuan to trade slightly stronger on Tuesday, but it was still not enough for a market overloaded with dollars as the yuan moved straight to the limit of its daily trading range.

The yuan firmed to 6.2297 per dollar in morning trade, from Monday's close of 6.2345.

The People's Bank of China (PBOC) fixed the official midpoint rate at 6.2926 per dollar, compared to Monday's fix of 6.2975, allowing the yuan to trade in a stronger range for the first time since last Wednesday, when the Chinese currency hit a record high against the dollar.

Under China's managed float regime, the dollar/yuan exchange rate is allowed to diverge away from the official midpoint rate by 1 percent in either direction.

For most of the year, the spot rate has fluctuated well within that range. But this month, the market has kept pushing the yuan to the top of its daily trading bands, and volumes have dropped off as customers refused to buy dollars in expectation that the central bank would eventually let the yuan strengthen further.

"I think there's still room for the yuan to appreciate," said a trader at a state-owned bank in Shanghai.

"But it is up to the bank to let it. If the bank allows more appreciation through the midpoint, the rate will go up. If the bank intends to force it down, that is what will happen."

Corporates appear to have plenty of dollars in hand, boosted by stronger-than-expected export earnings in October - most of which the PBOC allowed to remain in the banking system.

Central bank data shows that Chinese banks took on more than $20 billion worth of foreign currency in September, which together with a $32 billion trade surplus in October left the commercial banking system flush with dollars at a time when corporate demand for the greenback was low.

Traders and analysts have differing views over how long the pressure on the yuan to appreciate will last, but most agree that a combination of market factors that draw dollars out of the market, along with some form of regulatory intervention, will bring the bull run to an end by early 2013.