HONG KONG, Dec 10 (Reuters) - China's currency rose to a record high against the U.S. dollar for a second consecutive day on Tuesday after the central bank relaxed its grip on the yuan's movements. The People's Bank of China (PBOC) appears to have flagged a new round of appreciation for its tightly-managed currency into the closing days of the year after it aggressively fixed the daily midpoint at a record high for a third consecutive day. In opening trades, the yuan, also known as the renminbi, rose to a record 6.0703 per dollar compared to the previous close of 6.0723 per dollar after the central bank fixed the yuan's daily midpoint at 6.1114, its highest since a 2005 revaluation. While policymakers kept a tight leash on the Chinese currency's movements in November, heavy capital inflows to take advantage of the higher interest rates on the mainland and a revival in sentiment towards the Chinese economy have prompted the PBOC to relax its grip. The cumulative change in the yuan's fix over the last three sessions marks the biggest since early July, suggesting the central bank may have shifted its currency management policy. That shift has been dictated by heavy capital flows disguised as trade to exploit the widening interest rate differentials prevailing in the Hong Kong and the mainland markets where bond yields have slowly ratcheted higher in the onshore markets. Over the last two months, the spread between one-year debt in the Hong Kong and onshore markets has nearly doubled to 340 basis points, according to Thomson Reuters data. The combination of the Chinese yuan being the sole bright spot in the Asian foreign exchange markets this year and the PBOC dampening sharp currency moves have prompted companies to exploit the higher yields in the onshore market. There are signs that China's trade figures are again being distorted by speculative capital inflows disguised as exports of goods and services, with the State Administration of Foreign Exchange (SAFE) announcing over the weekend it will clamp down on the usage of foreign currency for trade finance.
Moreover, banks' FX purchases year-to-date is at a CNY 2.1 trillion compared to CNY 434 billion in the same period last year, a rough indicator of the amount of capital flows into the mainland while the trade surplus in November jumped to a staggering $33.8 billion. HSBC strategists say it is hard to see how policymakers can resist a stronger yuan when both the current and the capital accounts are experiencing strong inflows, an unavoidable outcome of the interest rate liberalization process. The one-year Chinese debt yield is at an attractive 4.06 percent compared with 2.6 percent for the Korean won, the next best performing Asian currency this year. "As a result, it should not be a surprise to see another move lower in the USD-CNY fixing, as the PBoC seems to be giving in to the stronger inflow pressures and allowing the currency to move in a manner that is more in line with its reform goals," they said in a note. The currency has risen 2.7 percent so far this year and is heading for a 3 percent appreciation for 2013 assuming it moves closer to 6.05 per dollar by year-end, tripling a 1-percent rise in 2012 and exceeding traders' expectations for a 2-percent gain.
The onshore spot yuan market at a glance:
Item Current Previous Change PBOC midpoint 6.1114 6.113 0.03% Spot yuan 6.0722 6.0723 0.00%
Divergence from midpoint* -0.64%
Spot change ytd 2.60% Spot change since 2005 revaluation 36.30%
*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 1 percent from official midpoint rate it sets each morning.
OFFSHORE CNH MARKET
The offshore yuan market at a glance:
Instrument Current Difference from onshore Offshore spot yuan 6.0645 0.13% Offshore non-deliverable 6.1175 -0.10%
*Premium for offshore spot over onshore
**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .
KEY DATA POINTS - Gap between PBOC midpoint and spot rate is narrowing. GRAPHIC: http://link.reuters.com/qyx74t - China's trade surpluses mainly driven by weak imports rather than strong exports. GRAPHIC: http://link.reuters.com/qav68s - Corporate FX purchases in May show reduction in yuan appreciation expectations. GRAPHIC: http://link.reuters.com/tyx74t - Hot money inflows turn to outflows in May GRAPHIC: http://link.reuters.com/saz74t - Despite relatively stable dollar/yuan exchange rate, the yuan is appreciating on a trade-weighted basis. GRAPHIC: http://link.reuters.com/sed74t
(Editing by Shri Navaratnam)