China's yuan weakens on profit taking, clampdown of hot money

China's yuan weakens on profit taking, clampdown of hot money

HONG KONG - China's yuan fell against the dollar on Thursday as investors betting on yuan appreciation moved to take profits toward year-end, while "hot money" inflows appeared to be dampened by Chinese regulators.

Traders say the upward trend of the Chinese currency remains intact, however, given China's good economic fundamentals and trade surplus. They expect the yuan to rise 2-3 per cent next year.

Spot yuan traded at 6.0748 per dollar near midday, down 0.05 per cent from Wednesday's close of 6.0717. The People's Bank of China (PBOC) fixed the official midpoint at 6.1115, down 0.02 per cent from the previous day's 6.1100.

"There were strong dollar purchases in the morning from both Chinese and foreign banks, while dollar selling activity declined significantly," said a trader at a Chinese bank in Shanghai, who mentioned the impact from news that China would take measures to curb hot money inflows.

Chinese regulators will clamp down on banks' and companies' use of foreign currency for trade finance by ensuring that trade deals are authentic and by monitoring for unusual cross-border cash flows, state media reported.

The foreign exchange reserves of the world's second-largest economy recently reached their highest level since January 2008 as a result of yuan appreciation and policy reforms, raising concerns that hot money inflows have quickened.

Traders said some investors who held long yuan positions preferred to take profits and close their positions toward year-end considering recent gains, leading to the yuan's weakness.

It has also been reflected in the offshore market, where the yuan edged down for the second day and began to show a discount against the onshore rate. Offshore yuan had a premium of more than 300 pips over onshore yuan in late November.

The "redback" strengthened for seven consecutive trading sessions since last Monday with total gains more than 200 pips after the central bank signalled a policy shift and relaxed its grip on yuan movements.

The PBOC has controlled the pace of yuan rises since the currency's landmark revaluation in July 2005. Despite this gradualism, the yuan has appreciated 36 per cent since the revaluation.

Beijing is accelerating its pace to reform the domestic financial system and open up the tightly-controlled capital account after the Communist Party's third plenum, with freer cross-border fund flows and interest rate liberalisation high on the agenda.

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