China's yuan floats to gauge market sentiment

09:26, June 23, 2010      

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Beijing took the first step towards currency reform this week to let the yuan float more freely on the spot market as it has risen in value against the U.S. dollar.

But analysts said China's central bank, the People's Bank of China, would try to prevent any large appreciation of the yuan in a short time span that would not be in the interest of China's and the global economy.

Any big gyrations of the exchange rate would throttle the market order and impede the economic recovery, they believe.

The central bank set the central parity rate on Tuesday -- the centre point of the yuan's official trading band -- at 6.7980 to the dollar, 0.43 percent stronger than Monday's central parity rate of 6.8275.

In trading on Tuesday, the yuan strengthened at one point to 6.7968 on China's main foreign exchange spot market before closing at a weaker 6.8136 due to domestic demand for the dollar.

Traders said that afternoon buying for the greenback on the spot market in Shanghai accelerated, as market somewhat felt unsure of a continuous strengthening of the yuan.

"We will continue to steadily advance the reform of the exchange mechanism of the RMB (yuan) under the principal of independent decision-making, controllability and gradual progress," said Qin Gan, China's foreign Ministry spokesman, on Tuesday.

Analysts say that Beijing will try to engender more freedom to the yuan's floating on the market, both up and down, to test the waters of how much its currency is esteemed and demanded on the market.

China, soon to be the world's second largest economy, ultimately eyes for free convertibility of the yuan with all major world currencies, analysts believe.

On Tuesday, traders reported that several Chinese banks were buying the greenback amid market speculation the central bank was encouraging dollar purchases to reinforce the perception that a more flexible system cuts both ways.

The 6.7968 level was the yuan's strongest since policymakers de-pegged the currency from the dollar in mid-2005 and moved to a managed floating exchange rate system.

A Reuters poll of 33 economists forecast the yuan would rise to 6.67 per dollar by the end the year, an increase of 2.4 percent from late last week and similar to the appreciation implied by offshore non-deliverable forwards.

People's Daily Online

(Editor:梁军)

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