China yuan hits record high on capital inflows

AFP/Beijing

The Chinese yuan closed at a record high yesterday as authorities continue to nudge the unit higher to encourage capital inflows, analysts said.

The yuan closed at 6.1939 to the dollar, stronger than the key 6.2 level and its best close since China launched its modern foreign exchange market in 1994, according to the China Foreign Exchange Trade System.

The Chinese currency also touched a record intra-day high of 6.1923 yuan.

China has faced pressure from the US and other countries to allow the yuan to appreciate, claiming its value is artificially low.

Analysts said a stronger yuan would help attract further inflows of foreign capital, which picked up as China’s economy has recovered, prompting authorities to keep the value high.

“Authorities have been worrying about capital inflows and outflows, fearing overseas capital that flew in earlier on optimism over the Chinese economy might leave the country,” said Jiang Shu, an analyst at Industrial Bank.

“In the near term the currency may continue to appreciate,” he added.

Recent data has indicated the pick-up in the world’s second biggest economy remains fragile. China recorded a rare trade deficit of $880mn in March, figures showed yesterday.

The US Treasury last November stopped short of labelling China a currency manipulator, noting gains in the value of the yuan, but said the currency remains “significantly undervalued”.

Meanwhile, Chinese imports of key commodities rebounded in March from the month before as hopes of a strengthening economy encouraged end-users to ramp up output and cautiously replenish stocks.

With broader trade data also signalling domestic demand is gathering the steam needed to drive a recovery in the world’s No 2 economy, analysts said China’s appetite for commodity imports should continue to see a modest recovery through the second quarter, when manufacturing and construction typically pick up.

Copper imports climbed 7.2% in March from February, iron ore increased 14.4%, while crude oil eked out a 0.2% rise, data from the General Customs Administration showed yesterday.

“We should see a modest recovery as economic activity picks up. We’ve already begun to see downstream industries start up more perceptibly in late March compared to earlier months,” said Cheng Sijin, a commodities analyst at Barclays Research.

“But reality will struggle to match hyped up expectations of a strong recovery. We expect to see a slow grind up in demand.”

China is the world’s top buyer of copper, soy, iron ore and its second-largest importer of crude oil after the US. All eyes have been on the pace of its economic recovery, with investors hoping it can offset resurgent worries over Europe’s debt crisis.

Cooling China inflation on Tuesday reinforced hopes for an extended period of easy monetary policy, but uncertainty about the latest bird flu outbreak in the country could offer some headwinds to demand.

China’s daily crude oil imports in March fell 2.1% versus a year earlier, however, as some refineries started maintenance programmes amid high fuel stocks. They dropped in line with expectations to 23.05mn tonnes, or 5.43mn barrels per day (bpd).

Chinese refineries processed close to 10mn bpd in the first two months of the year, a level just a touch off the record rate of 10.15mn bpd in December, as newly started refining facilities ran at high rates.

Iron ore imports grew 14.4% from the previous month, but shipments were still at their second-lowest in five months amid a tepid recovery in the country’s appetite for steel.

Compared to a year ago, March imports were up 2.7%. Total imports in the first quarter were flat from the year before at 186.5mn tonnes.

But with March being a longer month, analysts said the average daily increase for iron ore shipments worked out to be a mere 3%.

“This shows that steel mills are not significantly restocking and are just purchasing what they need despite inventory at ports having fallen to about 68mn tonnes from a high of around 97mn tonnes last year,” said Helen Lau, senior commodities analyst at UOB-Kay Hian.

“Mills have been quite cautious in importing iron ore because steel demand didn’t recover as expected in the first quarter and steel product inventories are still high at around 21mn tonnes.”

Elsewhere, copper imports rose 7.2% from February to 319,603 tonnes on hopes factories would ramp up output after the Lunar New Year break, but fell by a sharp 30% from a year ago.

The mild recovery in March arrivals came even though the price arbitrage for imports had improved, suggesting domestic demand remained sluggish.

Traders cautioned that April imports could come under pressure due to a drop in term shipments of the refined metal from key suppliers Chile and India.

Separately, China imported 3.84mn tonnes of soybeans in March, up 32.4% from February but down 20.5% from a year ago as port congestion in Brazil delayed some shipments.

Imports are expected to pick up from March after a seasonal slowdown in the first two months, but outbreaks of the new strain of bird flu in some areas could hurt restocking of soymeal for feed for poultry, traders said.

The commerce ministry has forecast April imports at 5.7mn tonnes, the highest so far this year. Meanwhile, imports could rise to more than 6mn tonnes in May and June, according to estimates by the China National Grain and Oils Information Centre (CNGOIC).