January 1, 2014 3:30 am JST

Yuan spiked in 2013 as illicit funds flooded China

NORIYUKI DOI, Nikkei staff writer

SHANGHAI -- The Chinese currency staged the sharpest appreciation against the dollar in two years in 2013, lifted up by a flood of money brought into the country by unscrupulous parties looking to reap profits from relatively high interest rates.

     The yuan climbed 2.91% against the greenback over the year. It traded at 6.0539 to the dollar in the Shanghai foreign exchange market Tuesday, marking a record high for the third straight trading day.

     The Chinese currency hit peaks in March and April due to an influx of investment money. Later, expectations that the U.S. Federal Reserve Board would scale down its quantitative easing temporarily weakened the yuan versus the dollar. But it soon began rising again, propelled in part by the nomination of Janet Yellen, a strong proponent of easy money policy, as the next Fed chief.

     Investment money has been flowing in from Hong Kong and elsewhere. Fearing an adverse impact on China's exports, foreign-exchange authorities cracked down on about $2.5 billion in illegal transactions during the January-November period.

     China's ban on speculative money from abroad has spawned the practice of bringing illicit funds into the country by inflating export prices, which entails creating fake certificates. Trading companies in Hong Kong and other parts of Asia are said to be among the culprits.

     Their aim is to cash in on the widening interest rate gap between China and other countries. The yield on 10-year Chinese government bonds climbed to a roughly nine-year high in late November as the central bank tightened the flow of funds to the money market. With interest rates low in industrialized nations, the resulting spread can lead to easy profits.

     Interest rates are forecast to rise further in 2014 as the central bank grows increasingly wary of a rapidly expanding money supply amid an economic slowdown. Analysts polled by The Nikkei and QUICK predict on average an exchange rate of 6.0005 yuan to the dollar at the end of 2014.