The yuan surged to a seven-month high against the US dollar yesterday in offshore forwards markets on speculation that China may be preparing to loosen tight currency controls.
Renewed expectations over a revaluation followed state media reports citing senior finance officials suggesting that China may be moving toward more flexibility on exchange rates - though top officials have repeatedly insisted that the central government is not planning any major changes in the near future.
A report on Thursday in the China Reform Daily, a newspaper published by the National Development and Reform Commission, cited Guo Shuqing, a vice governor of the central bank, as saying that changes in the yuan's value would not unduly disrupt trade.
"Stability doesn't mean not fluctuating," said Guo, who is in charge of the foreign exchange department at the People's Bank of China, the central bank. But he cautioned that "China also hopes the exchange rate will have a certain fluctuation but will control volatility and crisis."
China only allows limited trading in the yuan within a narrow 0.3 percent band beyond its official rate of 8.2770 yuan per dollar.
So there has been little movement in Shanghai's spot exchange rate, which was at 8.2764 yuan per US dollar early yesterday afternoon - level with its opening and slightly below Thursday's close of 8.2765 yuan per dollar.
But in the round-the-clock forwards market, which operates as a barometer of future expectations but does not affect the yuan's current value, the dollar had dropped to a 3,600-point discount to the yuan's spot price one year forward. The discount widened from 2,820 points late Thursday to its steepest discount since April 15.
The figures imply that market players expect the value of the dollar to slip to 7.9164 yuan in 12 months. That would mean a 4.3 percent rise in the yuan's value against the dollar.
Renewed upward pressure on the yuan coincides with a resumption of the slide in the dollar's value against other major currencies following the re-election of US President George W. Bush.
Weighed down by the huge US current account deficit and worries over the sustainability of the US economic recovery, the dollar has been weakening for months.
The central banks's move a week ago to raise interest rates for the first time in nine years has raised expectations that a change in currency policy might be the next major step on the economic reform agenda.