China says $3.7 trillion is enough – Will Mostly Stop Buying dollars to suppress appreciation of yuan

The People’s Bank of China said the country does not benefit any more from increases in its foreign-currency holdings, adding to signs policy makers will rein in dollar purchases that limit the yuan’s appreciation.

“It’s no longer in China’s favor to accumulate foreign-exchange reserves,” Yi Gang, a deputy governor at the central bank, said in a speech organized by China Economists 50 Forum at Tsinghua University yesterday. The monetary authority will “basically” end normal intervention in the currency market and broaden the yuan’s daily trading range, Governor Zhou Xiaochuan wrote in an article in a guidebook explaining reforms outlined last week following a Communist Party meeting. Neither Yi nor Zhou gave a timeframe for any changes.

China’s foreign-exchange reserves surged $166 billion in the third quarter to a record $3.66 trillion, more than triple those of any other country and bigger than the gross domestic product of Germany, Europe’s largest economy. The increase suggested money poured into the nation’s assets even as developing nations from Brazil to India saw an exit of capital because of concern the Federal Reserve will taper stimulus.

Yuan Appreciation now viewed as a net benefit to more people in China

Yi, who is also head of the State Administration of Foreign Exchange, said in the speech that the yuan’s appreciation benefits more people in China than it hurts.

There was a huge accumulation of foreign exchange reserves by the central bank in October. Boosted by good news at home, foreign exchange reserves may continue to increase, said Lian Ping, chief economist at Bank of Communications.

Wen Bin, senior analyst with the Bank of China, expects faster yuan appreciation in the near future. Appreciation of the yuan has brought capital inflows, but the trade surplus is no longer the main cause. Wen believes that capital inflow itself is now a driving force.

With China now exporting capital instead of goods, yuan appreciation becomes more acceptable. As new policy encourages domestic enterprises and financial institutions to venture forth, a strong yuan will sharpen the competitive edge of Chinese companies.

The currency has risen 2.6 percent so far this year and is heading for a 3 percent appreciation for 2013 assuming it lands somewhere around 6.05 per dollar by year-end, tripling a 1-percent rise in 2012 and exceeding traders’ expectations for a 2-percent gain.

“We expect the Chinese government to be more cautious this time and will prevent the yuan from appreciating too much,” said Bank of America Merrill Lynch strategists in a note.

Expectations of 4-5% rise in the Yuan in 2014

A 4% increase from 6.05 would be 5.8
A 5% increase from 6.05 would be 5.75.

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