More efforts needed to push for marketization of the yuan's benchmark deposit interest rates in face of speculative capital

The yuan rose 0.77 percent in April and 0.66 percent in May against the US dollar, much higher than 0.26 percent it rose altogether in the previous three months. The April and May rises were also higher than that for the whole of 2012.

The considerable appreciation has been largely attributed to the short supply of the yuan in the foreign exchange market, directly causing a rise in China's newly increased funds outstanding for foreign exchange. The monthly volume of the country's newly increased funds outstanding for foreign exchange was 683.7 billion yuan ($110 billion) in January, 295.4 billion yuan in February, 236.3 billion yuan in March and 294.4 billion yuan in April. The sharp rise in these funds has been driven by both the large-scale influx of international capital and the increased dollar-to-yuan conversions by domestic households and enterprises because of expectations that the yuan will appreciate. Due to a huge surplus in its international payment, China's newly increased foreign reserve in the first quarter was $157.1 billion.

China had strong export performance from January to April according to the official data, but there are extensive doubts about the figures, because there is a lot of evidence proving that short-term capital inflows via transfer pricing or false trade channels have made a large contribution to the 18 percent growth in exports from January to April. According to official statistics, China's trade surplus was $38.6 billion in the first quarter, but the United Bank of Switzerland put it at only $2.4 billion, sound proof that the country's newly increased foreign reserves in the first quarter of this year mainly came from the inflow of capital.

The yuan's higher interest rates than most other currencies and expectations for its continuous appreciation have served as major causes for the cross-border capital influx to China. The easing of concerns that China's economy might suffer a hard landing and the adoption of a new round of monetary quantitative easing by central banks in developed countries have also caused the flow of large volumes of short-term capital to emerging markets like China. The rapid rise in value of the yuan in recent months has also been closely related with reduced interventions from China's central bank into its foreign exchange market. The monetary authorities have instead chosen regulation of the yuan's central parity rate as the main way to regulate its exchange rate.

Reduced interventions into the yuan's exchange rate by China's central bank are aimed at coordinating the planned policy of expanding the range of the yuan's daily fluctuation against the dollar and the Japanese yen. Allowing a rapid rise in the yuan prior to the adoption of such a policy will possibly help reduce expectations for its further appreciation and facilitate earlier two-way fluctuations after the policy is adopted. It is also believed that the yuan's appreciation prior to the upcoming Sino-US Strategic and Economic Dialogue will reduce the possibility of the US using the yuan's exchange rate as a bargaining chip. At the same time, a strong yuan in the context of lingering weakness among other currencies will also facilitate China's push for internationalization of the yuan.