SHANGHAI—The yuan recorded a second month of strong gains in May, ahead of a rare presidential summit in California next week between the leaders of the U.S. and China.

China typically lets the gains in the yuan accelerate or rolls out exchange-rate reforms ahead of key international events during which Beijing faces increased pressure to relax control of its currency. This time around expectations are rising Beijing may soon allow a wider daily trading band to help accommodate the large gains in April and May.

Analysts say inflows of so-called hot money are also accelerating and adding to demand for the currency as global investors rush in to take advantage of high interest rates and the rebounding property market.

The improved sentiment in the yuan, despite signs of a slowdown in the broad economy, is also spilling over to China’s long-depressed stock market. The Shanghai benchmark index rose 5.6% in May, its best month this year and returning it to positive territory for the year.

“There’s evidence of continued capital inflows,” said Uwe Parpart, chief strategist at Hong Kong-based research firm Reorient Financial Markets. The inflows are so heavy that if the government sought to slow the yuan’s gains it would get “pushed into having to intervene very heavily, so you have to find some kind of middle-of-the-road approach.”

So far this year, the currency has appreciated 1.6%, with gains of 0.5% in May and 0.75% in April, against the dollar. Analysts at Australia & New Zealand Banking Group this month estimated the appreciation had risen to an annualized 4% pace, compared with an advance of just 1% last year.

Still, it may not be a one-way bet. The currency has weakened slightly in the past three days, and ended Friday at 6.1345 per dollar. One-year forward contracts imply a 2.1% depreciation for the Chinese currency in 12 months.

One sign of cash flooding into Asia’s largest economy is Chinese banks’ purchases of foreign exchange, which totaled 1.5 trillion yuan ($240 billion) in the first four months of the year, the latest data available, up sharply from 213 billion yuan in the last four months of 2012.

Traders say the People’s Bank of China has shifted tack in the past two months and cut back on costly purchases of dollars to curb the yuan’s strength. In the first quarter the yuan rose just 0.31% against the dollar.

The central bank has also set the yuan’s daily reference exchange rate against the dollar, which it uses to guide the direction of its own currency, at a record level during eight out of the 22 trading days in May. It also set the fixing higher from the previous day’s level in 12 of these sessions.

Analysts say Beijing may also be using a stronger yuan to curb inflation because it lowers the cost of imports.

“It may be preferable to contain overall price pressures with FX appreciation rather than [interest] rate hikes, because the latter would be a drag on the whole economy while the former, only on exports,” said Dariusz Kowalczyk, an economist at Crédit Agricole.

In addition, the tolerance of a stronger yuan is “a positive sign of commitment to reforms,” said Mr. Parpart. China’s new leaders have recently laid out plans to make hefty reforms, including an unusually explicit pledge earlier this month to draft a detailed proposal to allow the yuan to become fully convertible.

China and the U.S. are scheduled to hold their next semiannual Strategic Economic Dialogue in July, high-level talks that cover a broad range of issues affecting trade and investment between the world’s two largest economies. Before that Chinese President Xi Jinping will visit the U.S. for a “no ties, shirt-sleeves” summit with U.S. President Barack Obama on June 7 and 8.

“The band-widening may happen between California and the next Sino-U.S. Strategic Economic dialogue. That would be good timing,” said Mr. Parpart,

Beijing currently allows the dollar-yuan exchange rate to trade 1% above or below the daily reference exchange rate. It has widened the trading band twice since it dropped the currency’s peg to the dollar in July 2005, the last time in April 2012.

The PBOC is widely expected to double the width of the existing band to 2% when it makes the move.

 Source: Wall Street Journal

SHANGHAI—The yuan recorded a second month of strong gains in May, ahead of a rare presidential summit in California next week between the leaders of the U.S. and China.

China typically lets the gains in the yuan accelerate or rolls out exchange-rate reforms ahead of key international events during which Beijing faces increased pressure to relax control of its currency. This time around expectations are rising Beijing may soon allow a wider daily trading band to help accommodate the large gains in April and May.

Analysts say inflows of so-called hot money are also accelerating and adding to demand for the currency as global investors rush in to take advantage of high interest rates and the rebounding property market.

The improved sentiment in the yuan, despite signs of a slowdown in the broad economy, is also spilling over to China’s long-depressed stock market. The Shanghai benchmark index rose 5.6% in May, its best month this year and returning it to positive territory for the year.

“There’s evidence of continued capital inflows,” said Uwe Parpart, chief strategist at Hong Kong-based research firm Reorient Financial Markets. The inflows are so heavy that if the government sought to slow the yuan’s gains it would get “pushed into having to intervene very heavily, so you have to find some kind of middle-of-the-road approach.”

So far this year, the currency has appreciated 1.6%, with gains of 0.5% in May and 0.75% in April, against the dollar. Analysts at Australia & New Zealand Banking Group this month estimated the appreciation had risen to an annualized 4% pace, compared with an advance of just 1% last year.

Still, it may not be a one-way bet. The currency has weakened slightly in the past three days, and ended Friday at 6.1345 per dollar. One-year forward contracts imply a 2.1% depreciation for the Chinese currency in 12 months.

One sign of cash flooding into Asia’s largest economy is Chinese banks’ purchases of foreign exchange, which totaled 1.5 trillion yuan ($240 billion) in the first four months of the year, the latest data available, up sharply from 213 billion yuan in the last four months of 2012.

Traders say the People’s Bank of China has shifted tack in the past two months and cut back on costly purchases of dollars to curb the yuan’s strength. In the first quarter the yuan rose just 0.31% against the dollar.

The central bank has also set the yuan’s daily reference exchange rate against the dollar, which it uses to guide the direction of its own currency, at a record level during eight out of the 22 trading days in May. It also set the fixing higher from the previous day’s level in 12 of these sessions.

Analysts say Beijing may also be using a stronger yuan to curb inflation because it lowers the cost of imports.

“It may be preferable to contain overall price pressures with FX appreciation rather than [interest] rate hikes, because the latter would be a drag on the whole economy while the former, only on exports,” said Dariusz Kowalczyk, an economist at Crédit Agricole.

In addition, the tolerance of a stronger yuan is “a positive sign of commitment to reforms,” said Mr. Parpart. China’s new leaders have recently laid out plans to make hefty reforms, including an unusually explicit pledge earlier this month to draft a detailed proposal to allow the yuan to become fully convertible.

China and the U.S. are scheduled to hold their next semiannual Strategic Economic Dialogue in July, high-level talks that cover a broad range of issues affecting trade and investment between the world’s two largest economies. Before that Chinese President Xi Jinping will visit the U.S. for a “no ties, shirt-sleeves” summit with U.S. President Barack Obama on June 7 and 8.

“The band-widening may happen between California and the next Sino-U.S. Strategic Economic dialogue. That would be good timing,” said Mr. Parpart,

Beijing currently allows the dollar-yuan exchange rate to trade 1% above or below the daily reference exchange rate. It has widened the trading band twice since it dropped the currency’s peg to the dollar in July 2005, the last time in April 2012.

The PBOC is widely expected to double the width of the existing band to 2% when it makes the move.

 Source: Wall Street Journal