BEIJING (MNI) - The Chinese yuan stood out from the emerging markets pack in 2013, rising nearly 3% even as most of its peers were pounded by concerns about the global liquidity outlook as well as their own domestic economic problems. The yuan rose 2.91% against the greenback over 2013, far more than the 1.02% gain recorded last year and a significantly stronger performance than analysts had anticipated a year ago. This year's gains compare with the 4.7% rise in 2011, 2010's 3.63% increase, a 0.06% fall in 2009, 2008's 7.05% gain and the 6.86% jump seen in 2007 (expressed differently, yuan-dollar rose 1.01% in 2012 versus 4.5% in 2011). The fall of emerging markets currencies was one of the big market themes of 2013. Even as the year was drawing to a close, the Turkish lira was plunging to record lows as the Erdogan government was swept up by a rolling corruption probe. But the yuan escaped unscathed, and was forging new record highs against the dollar in the year's final trading days. A combination of factors have supported the yuan, not least China's relatively high interest rates, still-robust economic growth and trade activity, a buoyant housing market and capital controls. The government's reform commitments have also underpinned the currency's strength. Beijing didn't widen the currency's daily trading band again this year, disappointing those expecting another move following last April's increase to 1% from 0.5% on either side of central bank parity. But the new leadership has signalled that sweeping reform is in the pipeline. As part of the recently concluded Third Plenum, People's Bank of China Governor Zhou Xiaochuan pledged to gradually end the bank's regular market interventions, while the government has publicly committed itself to dismantling the capital control regime and building up the use of the yuan in the global economy. The outlook for the Chinese yuan is arguably clearer than that for Brazil's real or for the rupee. Optimism surrounding Beijing's reform plans, combined with improving global demand and steady domestic growth, argue for another year of modest appreciation. China Merchants Bank said in its 2014 outlook that the yuan has more room for appreciation next year as its rise didn't put pressure on exports and employment in the past year. "The yuan will not reverse its momentum of steady appreciation," said Liu Dongliang, an analyst with the bank, expecting the yuan to break 6.0 against the U.S. dollar in the first half of 2014 and rise to 5.8-5.9 by the end of the year. But the risks of a shock to sentiment can't be ruled out. As part of its planned overhaul of China's economic and financial system, the government has highlighted the threat posed by piles of debt at the sub-national level. Officials have signalled that 2014 may finally be the year in which Beijing allows a failure within the financial system, including a potential bond default or even a bank collapse. An outright default or failure would be a milestone in China's move towards a market-based economy. No yuan bond has yet been allowed to default -- government intervention is always the last stage of Chinese credit events -- because the multiple regulators in charge of the bond market aren't sure of the ripple effects of such a failure. The government's reform plans imply financial market volatility and challenges to long-standing investor confidence in Chinese economic stability. If it starts making good on those pledges in the new year, it could mean a rockier road for the yuan in 2014. The yuan has risen 35.74% since currency reforms were first announced in July 2005.

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