Yuan May Continue to Appreciate

The yuan may be trading at below 6.1 against the US dollar as the Chinese currency continues to rise in the next few months, said a currency analyst at DBS Bank.

A trader with an Asian bank in Shanghai said that the yuan's valuation has peaked for a few days, while sales of dollars are easing.

"Most of my peers working in Shanghai share the opinion that in the short term the renminbi may further appreciate against the US dollar," the trader said.

China's central bank, the People's Bank of China, set the yuan's midpoint at a record-high level of 6.1796 against the US dollar, while the spot yuan closed at 6.1345 per dollar on Friday.

It has been 12 months since Japan's yen and China's yuan became directly convertible, and the yuan has gained some 20 percent against the yen since the beginning of the year.

The appreciation of the yuan and the depreciation of the yen may cast risks to China's currency as it's the only currency which lacks the elasticity of East Asian economies, wrote Liu Yuhui, a financial researcher at the Chinese Academy of Social Sciences in an article published on Tuesday.

"It has been very difficult for us to guarantee orders from Japan these days because our price advantage disappeared," said Yuan Hongtao, owner of a Hangzhou-based plastic production company, which exports some 40 percent of its products to Japan.

Analysts said that policymakers now have to figure out ways to help companies grow, as the renminbi is increasingly going global.

"While the benefits of direct convertibility between the renminbi and other currencies are obvious, including cutting the costs of exchange and reducing the risks brought by the fluctuation of the US dollar, it can also bring some risks to companies and regions in China whose growth is driven by foreign trade," said Liu Yang, a foreign exchange analyst with Shanghai Gaofu Consultancy.

Currently, the yuan is directly convertible to the yen and the Australian dollar. New Zealand and China are in an early stage of negotiations for direct convertibility of each other's currencies, according to a Reuters report on May 26.

"One important step to make the renmibi more internationalized is to use more yuan in direct investment overseas", said Nathan Chow, vice-president and economist of group research with DBS Bank (Hong Kong) Ltd.

Chow said that only about 6 percent of China's outbound direct investment uses renminbi, while 36 percent of foreign direct investment in China uses renminbi.

If regulations on ODI using renminbi are eased, a large amount of yuan will be released to overseas markets and help divert risks of the fluctuation of the US dollar, which is being used for foreign exchange reserves, said Chow.

He added that more big corporations may want to issue dim sum bonds - yuan-denominated bonds issued in Hong Kong - as the renminbi bond market grew significantly this year, driven by lower funding costs, improved macroeconomic conditions and the heightened expectations for yuan appreciation.

"Despite all these factors, market facilities for renminbi bonds still have a lot of catching up to do. Decision makers and financial institutions need to work closer with corporations, while continuing to improve the fundraising infrastructure in offshore renminbi centers such as Hong Kong and Singapore," he said.

The yuan had appreciated 1.72 percent against the dollar since the beginning of the year, following a moderate gain of 1.03 percent throughout 2012.