China yuan projected at 6.0 and Japanese yen at 110 to the US dollar at the end of 2013

The Chinese yuan is set to strengthen as rising inflows of speculative capital add to pressure on the currency, the head of a Ministry of Commerce research institute said.

“Hot money is flowing into China, and that will push up the yuan exchange rate,” Huo Jianguo, president of the Chinese Academy of International Trade and Economic Cooperation under the ministry.

“China’s situation is exactly the opposite” of Japan’s, said Huo, who previously worked as a trade official in the commerce ministry. The yen is expected to continue weakening amid the Bank of Japan (8301)’s policy easing, Huo said, estimating the currency could drop to 110 per dollar this year.

HSBC Holdings Plc raised its estimate for yuan appreciation this year after stronger-than-expected gains in the first quarter, according to an April 17 report. The bank now sees the yuan trading at 6.14 per dollar by the end of the year, up from a previous estimate of 6.18, a full-year gain of around 1.5 percent.

The yuan ended trading at 6.165 to the US dollar.

China is likely to widen the yuan’s trading band against the dollar in 2013 to tighten monetary conditions, Commonwealth Bank of Australia strategists Richard Grace and Andy Ji wrote in a note yesterday. The yuan remains undervalued and will gain another 3 percent to reach 6 per dollar by end of this year, they forecast.

China’s foreign-exchange reserves, the world’s biggest at $3.44 trillion, jumped $128 billion in the first quarter from end-December. The central bank and financial institutions bought a record 684 billion yuan of foreign currency from customers in January and 295 billion yuan in February, indicating higher capital inflows.

Since the third quarter, “the private sector has turned more bullish” on the yuan, HSBC said. “Strong inflow pressures are likely to soften in the rest of” the second quarter “but we expect the RMB to stay resilient,” they wrote.

China’s foreign exchange reserves seem to be on track to top $4 trillion in 2014.

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