SHANGHAI: China's yuan firmed on Monday, as Chinese exporters sold dollars with the approach of the year end, and investors expected the economy to strengthen took heart from expectations for monetary loosening that should boost the economy.
Investors also interpreted regulators were marginally relaxing funding channels for developers as a sign that the fallout from a likely default by China Evergrande Group would be limited.
The yuan opened at 6.3720 per dollar and was changing hands at 6.3688 at midday, 72 pips stronger than the previous late session close. Prior to market open, the People's Bank of China set a strong midpoint rate, at 6.3702 per dollar.
China will cut banks' reserve requirement ratios (RRR) "in a timely way", state media on Friday quoted Premier Li Keqiang as saying.
Although expectations of looser monetary policies pushed down yields of 10-year Chinese treasury bonds on Monday, their spread over US counterparts, at roughly 1.4 percentage points, remained attractive to yield-hungry global investors.
Rocky Fan, economist at Sealand Securities, said he expects China to cut the RRR in the next one or two weeks, and more policy easing, including rate cuts, is needed.
A trader at a Chinese bank said that previous experience shows that RRR cuts typically support the yuan as the economic outlook improves as a result.
In addition "yuan is bolstered in the short term by robust money flows as many exporters tend to sell dollars toward year-end settlement."
Traders also brushed aside negative impacts on the yuan from Evergrande's financial woes. The heavily-indebted developer said on Friday there was no guarantee it would have enough funds to meet debt repayments, prompting Chinese authorities to summon its chairman.
Meanwhile, more real estate firms disclosed plans to issue bonds in the domestic market, as regulators said developers' normal funding needs would be met.
"We think the credit event will have limited impact on domestic and offshore bonds," China International Capital Corp (CICC) wrote.
"Impacts from this individual case are controllable."