China's central bank sets higher fixing for yuan

China's currency appreciated by the most since July 2005 on Monday, as investors played catch-up with US dollar weakness over the week-long Lunar New Year holidays, with some economists saying a higher-fixing from the central bank signaled lower odds of a large devaluation of the renminbi.

The yuan strengthened by 1.2% to 6,4975 per US dollar on Monday.

In parallel, the People's Bank of China, the country's central bank, set its daily reference rate for the yuan at 6.5118, up by 0.3% from that on 5 February.

Speaking over the weekend to Caixin magazine, Chinese central bank chief Zhou Xiaochuan sounded a confident note on the outlook for stability in the country's currency, saying that China's balance of payments position was "good", levels of capital outflows normal and the exchange rate against a basket of currencies of its main trading partners "basically stable".

"The lack of central bank communication throughout the two bouts of weakening the currency in the last 6 months have been deafening so this at least shows some willingness to communicate on something that has been threatening to destabilise markets with the fear of a big devaluation hanging over the market.

"Clearly the market might still force the issue and some credibility may have already been eroded but at least these words are a welcome response," Deutsche Bank's Michael Reid said, commenting on the content of Xiaochuan's interview.

Bloomberg's replica of the central bank's trade-weighted exchange rate for the yuan, or CFETS RMB Index, rose on Monday by 0.95% to a one-week high of 100.30.

Over the weekend, Deutsche Bank's chief china economist, Zhiwei Zhang, revised down his estimate of the odds of a large renminbi devaluation from 15% to 10%.

Commenting on the question of how long China's foreign exchange reserves could last, analysts at Capital Economics sounded a cheery note at the start of the week.

"The idea that the People’s Bank is running out of FX reserves doesn’t stand up to scrutiny. But the fact that many take it seriously is a sign of how far sentiment has swung against China.

"We believe it most likely that outflows will ease over coming months as the economic collapse many are expecting doesn’t happen, as expectations of major depreciation fade, and as firms finish reducing their level of foreign currency debt. In to go on intervening to limit exchange rate volatility," the bank's chief China economist, Mark Williams, said in a research report sent to clients.