China's yuan headed for a strong close to 2011 on Friday, touching a record high in early trade after the central bank set the mid-point at a fresh high, putting it on course to gain 4.5 percent for the year. The yuan's gains for the year are in line with the 4 to 5 percent traders in the onshore market had expected at the start of the year.
Traders still see the yuan appreciating for all of 2012 as China faces US pressure to do more to rebalance bilateral and world trade, while it continues to record trade surpluses. But the rate of appreciation is expected to slow to about 3 percent next year, with most of the rise happening in the second half, they said.
Many market players saw the strong mid-point as an attempt by the People's Bank of China to make the percent gain for the year look better. "After the PBOC set a record high mid-point today, some major state-owned Chinese banks quoted the yuan at high levels to support the central bank's window-dressing move," said a dealer at a major European bank in Shanghai.
The yuan has gained 0.6 percent over the past two weeks as the PBOC set a slew of record high mid-points. It adopted a similar approach at the end of 2010. Spot yuan opened at an all-time high of 6.3070 versus the dollar, topping its previous record of 6.3160 touched on Monday. It then pulled back slightly to trade mainly around 6.31, still up 0.15 percent from Thursday's close of 6.3192.
Before trading began, the PBOC fixed the dollar/yuan mid-point at a record high of 6.3009, up 0.23 percent from Thursday's 6.3157. The central bank uses the fixing to express the government's intention for the yuan's movements in a day. At its peak for the day, the yuan appreciated 4.5 percent this year. It has risen 8.2 percent since June 2010, when the government abolished a two-year dollar peg, and 31.2 percent since its landmark revaluation in July 2005.
Until early November, a firmer yuan seemed a sure-fire bet on a combination of pressure from China's trade partners and as the government battled stubbornly high inflation at home, a risk to the country's political stability. Offshore, benchmark one-year non-deliverable forwards (NDFs) fell to 6.3930 on Friday against 6.4000 at the close on Thursday, but still implied that the yuan would depreciate over the next year. They now imply 1.44 percent depreciation over the next year, compared with a 1.55 percent fall implied on Thursday.