Sustained bullish sentiment has driven China's currency, the renminbi, to a record high for three straight days, triggering expectations the yuan could reach 6.2 against the dollar by the year end.

But some analysts are less optimistic, believing it will depreciate, following the United States presidential election and the 18th National Congress of the Communist Party of China, which closed on Wednesday.

The People's Bank of China, the central bank, has been raising the reference rate of the yuan against the dollar for seven straight days. On Wednesday, it set the midpoint at 6.2881, the highest level since May.

On the spot market, the currency soon moved to hit its strong-side limit at 6.2252 on the day, the strongest level since China opened its domestic currency market in 1994.

"We think market forces have played a much bigger role than the government in recent yuan appreciation. The third round of quantitative easing in the US, China's growth recovery, as well as widening trade surplus are probably among the key driving forces," said Yao Wei, China economist at Societe Generale CIB.

China's capital account is also more open than before and so currency movement becomes more self-enforced as a result of market expectations, she said.

The yuan has appreciated more than 1 percent so far this year, reversing a depreciation of as much as 1.6 percent in the year by late July.

Nathan Chow, DBS Bank's Greater China economist, said another contributing factor is that the eurozone debt crisis seems to have stabilized for now, without further signs of deterioration.

Pressure from major economies is not a major driver of the yuan's appreciation, he said.

"The ratio of current account surplus to GDP has declined to 2 percent this year from 10 percent in 2007, reflecting that the pressure on China to appreciate the yuan is smaller than before."

He said there were expectations the yuan could reach 6.2 to the dollar by the year end.

But expectation of the yuan depreciating remains strong as a rebound in the world's second-largest economy - which has slowed for seven consecutive quarters - still faces challenges.

"This trend of appreciation is unlikely to be sustainable and we expect the yuan to depreciate moderately against the US dollar in December," said Yao.

Although the currency's onshore spot rate continued to strengthen, the offshore one-year non-deliverable forwards of the yuan indicated it will depreciate by as much as 1.8 percent in the next 12 months, dampening its popularity among global traders.

Chow said that in the next three months, some uncertainties will affect the yuan's pricing. For example, if there is no announcement of aggressive stimulus after the 18th CPC National Congress, market disappointment might drag on the yuan somewhat.

"What's more, concerns over the US' 'fiscal cliff' might also dampen the yuan's further appreciation," he said.

The "fiscal cliff" is a reference to the effect of a series of laws that will result in spending cuts, tax increases and reduction of the budget deficit beginning in 2013.

Heikki Oksanen, a professor at the University of Helsinki and a former research adviser at the European Commission, said: "We should not draw strong conclusions from these recent movements. Now, after the euro has adjusted to close to its long-run average, the yuan is effectively 3 to 4 percent stronger (against a trade-weighted basket) than in June 2010."

Oksanen said focusing so much on the yuan's dollar rate does not reflect China's trading relations, as the yuan's value against a trade-weighted basket of currencies will probably gain more importance.

"As China's economy is growing, appreciation of the yuan in real terms against a wide basket will follow in the long run. In principle, this will happen as a result of a combination of increasing relative prices and costs in China and occasional appreciation of the yuan's nominal rate."

Analysts said given that the new leadership will need some time to convene and decide on the next steps, the authorities might announce new policies related to exchanges rates - widening the yuan's floating band in the first or second quarter of 2013, for example.

In April, the central bank widened the band that it allows the yuan to diverge from the official midpoint, to 1 percent from 0.5 percent. Since then, the currency has exceeded the upper limit of the trading band on more than 100 trading days, indicating the need to further broaden the range, Chow said.

Analysts also said yuan speculation has led to capital inflows into Hong Kong as investors seek ways to gain access to the mainland market.

Chow said: "Smart money is likely to continue flowing (into Hong Kong), as China's economy and fiscal stance remain better than most countries in the world. Maintaining the Hong Kong dollar's peg with the US dollar might be the only practical option for the Hong Kong government."

Norman Chan, chief executive of the Hong Kong Monetary Authority, said in a statement on Friday that talk of so-called hot money flowing into Hong Kong from overseas investors for speculation on the yuan is unfounded.

He said overseas investors can directly buy yuan in the offshore market with US dollars if they are bullish on the appreciation of the currency.

It is impossible for such inflows to threaten China's financial stability or safety, given the country's banking system has assets worth 126 trillion yuan, he said.

wangxiaotian@chinadaily.com.cn

(China Daily 11/15/2012 page13)