By Bloomberg News - Aug 11, 2010 2:34 PM GMT+0800
China’s yuan may rise to 5 per dollar in about five to six years of time as the central bank will permit appreciation to curb growth in the nation’s foreign-exchange reserves, CLSA Ltd. said.
The yuan is 30 percent undervalued against the dollar, said Amar Gill, CLSA’s head of thematic research in Hong Kong, citing an estimate based on purchasing-power parity. China’s central bank loosened controls on the yuan’s exchange rate on June 19, after keeping it little changed at 6.83 per dollar for almost two years by selling the local currency in the interbank market.
“It’s a headache for Beijing because they have to determine what to do with reserves,” Gill said in a conference call today. “Allowing the yuan to appreciate means Beijing will become less active in selling yuan and buying dollars.”
China is seeking to allow the yuan to strengthen to deflect criticism from its trading partners, while protecting a recovery in its exports. The nation’s foreign-exchange reserves expanded $7.19 billion in the second quarter to a record $2.45 trillion, the smallest increase since the second quarter of 2001, according to central bank data on July 11.
The yuan was little changed at 6.774 per dollar as of 2:27 p.m. in Shanghai, according to the China Foreign Exchange Trade System. Twelve-month non-deliverable forwards s;lid 0.1 percent to 6.671, signaling bets the currency will strengthen 1.5 percent from the spot rate in a year.
A strengthening Chinese currency will spur capital inflows to Hong Kong, helping drive prices of property and stocks higher in the city, said Gill. The abundant capital will also help drive down money-market rates, he said.
The three-month Hong Kong interbank offered rate for loans in the city’s currency’s slid to a two-month low of 0.32 percent today, according to a daily fixing. The London interbank offered rate for U.S. dollars over a similar timeframe was yesterday fixed at 0.40 percent. The two currencies are pegged.
Yuan deposits in Hong Kong climbed 4.8 percent in June to 89.7 billion yuan ($13.2 billion), the highest level since the Hong Kong Monetary Authority allowed yuan accounts to be set up in February 2004, according to HKMA data on July 30.
--Judy Chen. Editors: James Regan
To contact Bloomberg News staff for this story: Judy Chen in Shanghai at +86-21-6104-7047 or xchen45@bloomberg.net.
From Bloomberg News published on Aug 11, 2010 2:34 PM GMT+0800