THE yuan rose to a record high yesterday in Shanghai, a day after China said it will increase flexibility of its foreign exchange regime.
The yuan ended at 6.7976 against the United States dollar yesterday in Shanghai, up 0.42 percent from Friday, according to China Foreign Exchange Trade System data.
It's the first time the yuan has broken the psychologically-important level of 6.8 against the greenback. The People's Bank of China over the weekend pledged to increase the flexibility of China's exchange rate regime and further improve the exchange rate mechanism and ruled out a one-off appreciation. The mechanism for the yuan will be based on market demand and supply with reference to the value of currencies in a basket, with the US dollar expected to be the dominant currency.
The announcement of the currency reform was welcomed around the world, including the US and the European Commission.
The yuan has been de facto pegged to the greenback since the middle of 2008 at around 6.83 to minimize the impact from the global financial crisis on Chinese exporters.
Economists, however, said a yuan appreciation would be gradual over the long term.
"We note that the PBOC statement falls short even of our modest expectations for a widening of the yuan's trading band," JPMorgan said yesterday in a research note.
The yuan is allowed to fluctuate by a 0.5 percent daily trading band, whose upper limit was never tested.
But things may change in the future as the currency has now been set to trade more flexibly.
"We think the announcement is more about flexibility rather than the signal of the imminent central parity move," Tommy Xie, an OCBC Bank economist, said yesterday in a note.
The central bank set the central parity rate at 6.8275 yesterday, the same as last Friday.
"The move aims to enhance the yuan's flexibility and will also alleviate the political pressure from the US side before the G20 meeting this weekend," OCBC's Xie said.
JPMorgan said the PBOC's wording of "continued emphasis would be placed to reflecting market supply and demand" may suggest there could be less intervention from the central bank going forward.