Limited room for further RMB appreciation

BEIJING - China's currency the renminbi, or yuan, strengthened 52 basis points to hit a record-high 6.2454 against the US dollar on Monday, sparking concern about the yuan's accelerated appreciation.

However, analysts said that faced with pressures from major currencies, including a strong US dollar and a weak Japanese yen, the Chinese yuan has only limited room for further appreciation.

In China's foreign exchange spot market, the yuan is allowed to rise or fall by 1 percent from the central parity rate each trading day.

Data show that the yuan has edged up 443 basis points against the US dollar since the first trading day of this year, compared to the total of 146 basis points it advanced during all of 2012.

Ding Zhijie, head of the School of Banking and Finance at the University of International Business and Economics, said the yuan's recent appreciation has been mainly pushed by recovering trade data in the first two months.

Abundant global liquidity caused by the latest round of quantitative easings in the United States and Europe, as well as a weakened Japanese yen that is likely to induce collective appreciation of other East Asian currencies, also added to the yuan's appreciation pressure, Ding said.

Liu Yuhui, a finance scholar with the Chinese Academy of Social Sciences, said the yuan now faces dual pressures.

On one hand, the currency has to remain relatively weak in response to a strong dollar and a weak yen, but it also needs to be relatively strong in order to maintain a steady domestic financial market, Liu said.

On Friday, the US Department of the Treasury denied that major trade partners, including China, have manipulated their currencies, while warning Japan against the yen's competitive devaluation to gain trade advantages.

The US, however, said the yuan remains undervalued against the greenback.

Ding said the yuan's current exchange rate stood within the range of the equilibrium exchange rate, leaving limited room for further appreciation.

Uncertainty in external demand, according to Ding, will make China's foreign trade a weaker factor in supporting the yuan. As the US dollar is likely to go strong due to domestic economic recovery, the yuan would also be restricted from further gains against the dollar, he said.

Moreover, the yen's devaluation may worsen the trade balances of other East Asian countries in the coming months, making a collective currency depreciation not inconceivable, the economist forecast.

Also on Monday, Chinese official data showed that the country's gross domestic product growth unexpectedly slowed to 7.7 percent in the first quarter of 2013, down from 7.9 percent during the final quarter of 2012.

Market sentiment over the tepid economic growth may also hamper the yuan from further appreciation, said Liu Dongliang, a senior analyst with China Merchants Bank.