Yuan gains after exports expand

The Chinese currency yuan strengthened against the dollar on Monday after the central bank set the daily midpoint for the currency to the highest level since early April amid fresh signs of stabilization in China's economy.

The spot yuan rate closed at 6.2404 against the dollar Monday, 98 basis points stronger than the closing rate on Friday, data from the China Foreign Exchange Trade System showed.

Before the start of trading, the central bank set its central parity rate of the yuan against the US dollar to 6.1485 on Monday, 138 basis points stronger than the previous trading day and the biggest rise in 18 months.

The appreciation came after China posted strong trade figures on Sunday. Exports expanded 7 percent year-on-year in May, quickening from the 0.9 percent rise in April. The trade surplus also widened sharply to $35.9 billion in May from $18.5 billion in April, the biggest single-month surplus since February 2009.

"Since the beginning of the year, the spot rate had depreciated more than 3 percent and the central parity rate declined by more than 1 percent. The expectations for further depreciation are weakening," Liu Xuezhi, an analyst at Bank of Communications in Shanghai, told the Global Times Monday.

The strong export figure is one of the factors that contributed to the appreciation of the yuan on Monday. With the surplus hitting a new high in five years, the pressure for the yuan appreciation is increasing, Liu said.

The yuan has slumped significantly since the beginning of the year especially after the country's central bank announced in March to expand the daily trading band of the yuan's exchange rate against the US dollar to 2 percent above or below a daily reference exchange rate from its previous 1 percent limit.

But before the unexpected long run of depreciation early this year, the yuan had appreciated more than 30 percent since 2005 when China launched the reform on the exchange rate regime.

"Monday's yuan appreciation is a natural reaction to the strong trade surplus posted on the previous day," Jin Baisong, a research fellow with the Chinese Academy of International Trade and Economic Cooperation, told the Global Times Monday.

By allowing the yuan to depreciate or appreciate sharply so far this year, the policymakers are testing what should be the reasonable upper and lower limit for the yuan rate movement, Jin said.