CICC predicts yuan appreciation won’t continue

A Chinese 50 yuan banknote is seen in this photo illustration taken in Beijing, Oct 12, 2012. [Photo/chinadaily.com.cn]

The recent robust strengthening of the yuan probably will not continue as the currency is close to its equilibrium level, and China’s central bank will not allow too much appreciation, according to a report released by China International Capital Corp Ltd on Nov 5.

The room for the yuan to further appreciate will be limited in the long run as effects on the currency from the US’ third-round of quantitative easing, or QE3, become less important, the report said.

The CICC predicted that by the end of 2012, the yuan will be trading at 6.27 against the dollar, and that rate might be the same even at the end of next year.

In September, the yuan appreciated 1 percent against dollar. In recent trading days, the currency hit a record high and frequently touched the allowed upper limit of 1 percent around the daily midpoint set by the central bank.

“As willingness among enterprises and individuals to sell foreign currency and hold yuan increased after the QE3, the central bank didn’t sell yuan to buy foreign currency positively, allowing the market to drive yuan up,” the CICC said.

CICC said the behavior of the central bank should be noticed, but at present it’s difficult to say whether bank moves are a reaction to short-term political factors such as the US presidential election, or a signal that the bank is becoming more tolerant of yuan appreciation.

However, “Judging from the economic situation, the People’s Bank of China doesn’t have reason to allow continuous appreciation of yuan,” the report said.

The effect of QE3 will not be sustainable as enthusiasm among enterprises and individuals to sell foreign currency and hold yuan will ease gradually, it said. The population and economic situation in the long term also could lead to a scenario in which the yuan doesn’t have a solid enough foundation for further appreciation, the report said.