SHANGHAI (Sept 9): China's yuan strengthened to a six-month high against the dollar on Tuesday after the central bank set a sharply stronger midpoint even amid worries that the economy is slowing.
The yuan has been appreciating gradually since May, buoyed by a steady increase in China's foreign trade surpluses, partially reversing a sharp downtrend in the first four months of this year.
But the focus has now turned to whether the People's Bank of China (PBOC) will continue to let the yuan appreciate further or intervene in the market to temper the its strength.
Spot yuan firmed to 6.1317, its strongest since March, compared with last close of 6.1412 on Friday, after the People's Bank of China (PBOC) set the official midpoint at 6.1520 versus previous fixing of 6.1707.
It was the biggest single-session rise in the midpoint since November 2010.
Markets were closed on Monday for a public holiday.
"Today's midpoint reflected China's trade data on Monday," said a trader at a Chinese commercial bank in Shanghai.
"The PBOC has been set stronger midpoints since May when China's exports and trade surpluses have been recovering, guiding the yuan up gradually."
China's import growth unexpectedly fell for the second consecutive month in August, highlighting soft domestic demand, while exports were surprisingly buoyant, pushing the trade surplus to an unexpected all-time high of $49.8 billion.
A trade surplus would lead to more fund inflows, leading to a stronger currency which could hamper exporters' competitiveness.
Exports rose 9.4 percent from a year earlier to beat a forecast rise of 8 percent, although the growth rate slowed from 14.5 percent in July. Shipments fell on a month-on-month basis.
Other data in coming days is also expected to show continued weakness in the economy, which could increase pressure on the government to unveil more stimulus measures.
Analysts have said bigger surpluses as well as continued inflows of hot money due to China's relatively attractive interest rate differential could put further appreciation pressure on the yuan.
The yuan's value has long been a sticking point between China and its major trade partners including the United States, which accuse Beijing of deliberately suppressing the currency to help its exporters.
China has always denied such accusations, even though its central bank is often seen by traders to be intervening in the currency market.
In the short term, however, many traders expect the yuan's upside to be limited given the dollar's strength.
A Reuters poll published last week showed that the yuan will probably appreciate slowly over the next year, changing hands at 6.12 yuan in six months and 6.06 yuan in a year.