Yuan bounces back as PBOC shifts reference rate

Central bank move lifts yuan to biggest single-day rise in 20 months

The People's Bank of China, the central bank, set the yuan's daily reference rate against the US dollar to its biggest single-day rise in 20 months on Monday, after the nation reported the biggest trade surplus in five years in May.

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Allaying fears that the move would trigger currency appreciation, industry experts said it shows the central bank's commitment to promote two-way fluctuation.

The daily reference rate, against which the yuan can fluctuate 2 percent either way, strengthened 0.22 percent from Friday to 6.1485 a dollar. Under the guidance, the spot rate edged up 0.2 percent to 6.2352 a dollar, according to data from China Foreign Exchange Trade System & National Interbank Funding Center. Offshore yuan climbed 0.3 percent to 6.2278.

The trade surplus was $35.9 billion in May, almost doubling the $18.5 billion in April, General Administration of Customs said on Sunday. Exports were largely in line with market expectations, rising 7 percent year-on-year, up from a 0.9 percent increase in April and a 6.6 percent drop in March.

Weaker imports led to the wider surplus. Imports fell 1.6 percent in May, after rising 0.8 percent in April, against the consensus expectation of 6 percent and Barclays Plc's forecast of 7.5 percent.

Despite continued sizable inflows through trade, the yuan remained soft against the dollar in May, floating between 6.22 to 6.27, suggesting reduced capital inflows from other channels and signs of capital outflows.

"Looking ahead, we see the currency remaining at the current level with some room for further depreciation if growth continues to disappoint. We think the 3.5 percent yuan depreciation against the US dollar year-to-date reflects weak economic activity in the first quarter and increasing concerns about downside risks to growth given the property market correction," said Barclays in a research note to clients on Monday.

"That said, we think the central bank will use both yuan/US dollar fixings and foreign exchange intervention to manage the degree of near-term depreciation to avoid expectations of large currency depreciation."

Wang Tao, a Hong Kong-based China economist with UBS AG, wrote in a note on Monday that China's imports should firm up in the coming months on the back of the government's accelerated project approvals, though import growth will be capped by the ongoing slowdown of the property market.

"This should result in a likely expansion of China's trade surplus, which will limit any downside pressures on the yuan's exchange rate. We see the yuan holding at around 6.25 against the US dollar at the end of 2014," she said.

Liu Ligang, Hong Kong-based chief China economist with Australian and New Zealand Banking Group Ltd, wrote in a Monday note that he believes that the US dollar/yuan fix is close to peaking, which will result in a period of stability in the yuan, and the PBOC will guard against further sharp depreciation of the yuan. Liu said that he expects the year-end US dollar/yuan rate to be around 6.15.