By SHEN HONG And WYNNE WANG
SHANGHAI â€"The Chinese central bank guided the yuan to a fresh record high for the second straight day Friday, amid renewed pressure from Washington for Beijing to let its currency appreciate more and as a high-level Sino-U.S. economic dialogue approaches.
The authorities' aggressive move came despite growing consensus among investors that the days of fast yuan appreciation are over after Chinese leaders repeatedly described the currency as nearing fair value in recent weeks. A stable, if not weaker, outlook for the yuan is also supported by data showing a slowing China economy and shrinking current account surpluses for the exporting powerhouse.
The People's Bank of China set the dollar/yuan central parity rate at 6.2787, the lowest level since China depegged its currency from the dollar in 2005 and down from Thursday's 6.2829. The reference exchange rate is also lower than Thursday's close at 6.3060 in over-the-counter trading.
The yuan, however, started weakening against the dollar shortly after trading opened, reflecting the market's concerns over the health of the Chinese economy.
At 0323 GMT, the exchange rate stood at 6.3072.
The record yuan fixing came after U.S. Treasury Secretary Timothy Geithner said Thursday China hasn't gone far enough in its efforts to open its economy or allow its currency to appreciate, outlining key U.S. concerns ahead of a summit with the Asian nation.
"We have unfinished business and new challenges ahead," Geithner said in remarks prepared for an event in San Francisco.
Geithner's comments come ahead of next week's U.S.-China Strategic and Economic Dialogue in Beijing. The Treasury Secretary and Secretary of State Hillary Clinton are scheduled to meet with Chinese Vice Premier Wang Qishan and State Councilor Dai Bingguo May 3-4.
"The central bank is playing the political card...The central parity may continue to fall until the China-U.S. dialogue starts," said a Shanghai-based foreign bank trader.
Faced with mounting political pressures, Beijing has on various occasions guided the yuan stronger, often in defiance of market expectations, in the run-up to major international events such as the Group of 20 summits and visits by Chinese or U.S. leaders.
The strong yuan fixing came in defiance of data showing the world's No. 2 economy losing steam. China's gross domestic product grew at a lower-than-expected 8.1% in the first quarter, its slowest pace in three years.
The PBOC's recent decision to double the yuan's trading band against the dollar to 1.0% above and below the central parity was also a strong signal of the authorities' confidence that investors have scaled-back expectations for yuan appreciation.
However, to some observers, the yuan's long-term prospects remain bright, given China's still solid economic fundamentals.
The yuan still has considerable room to appreciate in the long run and the currency is likely to rise 2% to 3% against the dollar by the end of this year, Woody Chan Kang-muk, treasurer of Citic Bank International, told Dow Jones Newswires recently.
While many traders attributed the PBOC's move Friday to political factors, some argued that the official fixing was in line with in-house estimates by banks.
One foreign bank trader said his bank's estimate of Friday's central parity was 6.2786, just a whisker away from the official one. A trader with another foreign bank said its estimate was 6.2800.
The PBOC collects dollar-yuan quotes from the 26 market makers as samples for its own calculations of the day's central parity but it doesn't disclose the weighting it assigns to each bank's quoted price.
It could be a mere coincidence that the fixing matches some banks' estimates and investors need more evidence in the long run to conclude if market forces have replaced political factors as the PBOC's main criteria for guiding the yuan's direction at times like this, traders said.
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