Chinese yuan hits 16-month high

China’s yuan has risen past 7 yuan per dollar for the first time in 16 months, as investors digest China’s recent stimulus measures and the US Federal Reserve’s interest rate cuts that have weighed on the dollar.

The offshore yuan briefly strengthened to 6.9951 yuan per dollar on September 25, extending a recovery of about 4 percent from its yearly low in July.

Earlier, China on September 24 launched a series of policy support measures amid concerns about its growth target.

Unlike the developments in the overseas market, the yuan in the domestic market could not break through the level of 7 yuan per 1 USD, when it only stopped at 7.0012 yuan per 1 USD in this session.

The yuan has rallied in the third quarter, as the dollar hovered near its lowest level since January on expectations that the Fed will continue to ease policy after cutting interest rates by half a percentage point.

The yuan’s rally could be prolonged if the dollar’s ​​weakness prompts Chinese exporters to convert some of their large dollar holdings into local currency.

Capital flows into the country improved in August, when for the first time in 14 months, the amount of foreign currency sold by domestic companies at banks was higher than the amount bought.

The PBoC's stance on the yuan has been in the spotlight, after its assessment of the currency turned from bearish to bullish, thanks to a series of stimulus measures announced on September 24.

While such an improvement in assessment is welcome news for the PBoC, the bank remains wary of signs of excessive yuan strength – which could hurt the competitiveness of Chinese exports.

The PBoC's September 25 yuan reference rate reflects the bank's neutral stance on the yuan, at least for now.

The PBoC announced the rate at 7.0202 yuan per dollar, close to the estimate of 7.0206 yuan per dollar given by traders and analysts in a Bloomberg survey.

Mr. Khoon Goh, Head of Asia Research at Australia & New Zealand Banking Group (ANZ), commented that Chinese authorities have no intention of stopping the yuan's appreciation, and the PBoC is "giving the green light" for the currency to increase further.

However, there is still a possibility that the PBoC will push back the yuan's rise, as recently, in a press conference on September 24, PBoC Governor Phan Cong Thang said that China will not let the yuan exchange rate fluctuate too much.

He stressed that the yuan exchange rate has a solid foundation to maintain stability.

Mr Khoon said the PBoC has many tools to slow the yuan's appreciation.

According to this expert, the PBoC can reduce the risk provision ratio for foreign currency futures transactions from the current 20% to 0%, or increase the reserve requirement ratio for foreign currency deposits of commercial banks.

Ken Cheung, head of foreign exchange strategy in Asia at Mizuho Bank, said the yuan may not be able to stay stronger than 7 yuan per dollar for long if China's data and property market do not show a significant improvement.