Bloomberg News

China Yuan Strengthens as PBOC May Allow Gains to Curb Inflation

October 12, 2011

Oct. 12 (Bloomberg) -- China’s yuan strengthened as the nation’s stocks rose the most in a year and on speculation policy makers will allow exchange-rate gains to curb inflation.

The currency erased an earlier loss of as much as 0.3 percent as the Shanghai Composite Index rallied 3 percent. The yuan in Hong Kong jumped the most since September 2010, after falling as much as 1.2 percent earlier. The U.S. Senate passed a bill yesterday that would allow sanctions on countries with misaligned exchange rates. The People Bank’s of China said today the yuan’s exchange rate was at a “reasonable level” and it would continue "gradual" currency reform.

“It’s a very volatile day for both onshore and offshore yuan,” said Jonathan Cavenagh, a Singapore-based senior currency strategist at Westpac Banking Corp. “As the market stabilizes, people are again selling the dollar and buying the yuan. China will continue with the gradual appreciation approach regardless of the U.S. Senate bill, which is political posturing.”

The yuan rose 0.26 percent to close at 6.3585 per dollar in Shanghai, after falling as much as 0.3 percent, according to the China Foreign Exchange Trade System. In Hong Kong’s offshore market, the yuan rose 0.76 percent to 6.4260, a 1.1 percent discount to the onshore spot rate. Twelve-month non-deliverable forwards were little changed at 6.3805.

Consumer prices in China climbed 6.1 percent in September from a year earlier, compared with August’s 6.2 percent increase, according to the median estimate of 22 economists surveyed by Bloomberg before the data due on Oct. 14.

“There’s still strong desire in Beijing for the currency to appreciate, with the domestic reasons to deal with inflation and rebalance the economy,” said Brian Jackson, a Hong Kong- based strategist at RBC Capital Markets.

Dumping Duties

The Senate voted 63-35 yesterday to approve the measure. Under the bill, governments that undervalue their currencies would face penalties, including increased dumping duties. House Speaker John Boehner has said the measure risks starting a trade war and urged President Barack Obama to oppose the bill. The proposed U.S. legislation will disturb trade relations, China’s Ministry of Foreign Affairs said in a statement.

The People Bank’s of China set the daily reference rate 0.2 percent weaker at 6.3598 per dollar today. The yuan is allowed to fluctuate 0.5 percent on either side of the fixing. The U.S. currency bill violates world trade rules and will not achieve its aim of addressing American unemployment, Foreign Ministry spokesman Liu Weimin told reporters at a briefing in Beijing today.

Wider Swings

“The fixing today could be interpreted as a sign that Beijing doesn’t want to be pressured by the U.S.,” said RBC’s Jackson. “The Senate bill is unlikely to be passed by the House and signed by the President. The bill may actually make it harder, not easier, to encourage China to appreciate its currency.”

Price swings in the yuan have widened in the past two weeks. The yuan moved 0.497 percent from the reference rate today, Bloomberg data show. The currency also neared the bottom of the trading range in the final three days in September.

One-month implied volatility, a measure of exchange-rate swings used to price options, was 3.35 percent today, from 1.8 percent as of Sept. 1, according to data compiled by Bloomberg.

‘Election Politics’

U.S. Treasury Secretary Timothy F. Geithner said in Washington yesterday in a Bloomberg TV interview that China must move more quickly to allow its currency to appreciate and he’s “very supportive” of the objectives of the Senate’s China bill. The yuan has risen 10 percent in real terms since summer last year and the U.S. has been pushing China “very hard” on the currency, Geithner said.

China has been aggressive in “gaming the trading system,” including intervening to keep the value of its currency artificially low, Obama said in Washington last week. He also warned that legislation in the Senate to penalize China risked triggering a trade war.

“The bill is aimed at U.S. election politics,” Tim Condon, Singapore-based head of Asian research at ING Groep NV, wrote in a note today. “The threat of a trade war will keep it from being passed.”

Global Demand

Yuan appreciation may slow if China’s exports fall further, Jackson said. The world’s biggest exporting nation faces the risk of its two largest markets, the European Union and the U.S., falling back into recession. China’s exports rose 20.5 percent in September from a year earlier, down from 24.5 percent in August, according to the median estimate in a Bloomberg News survey of economists before data due tomorrow.

China’s gross domestic product climbed 9.3 percent in the third quarter from a year earlier, according to a separate survey before a report due next week. That would be the third straight quarter of slowing growth.

The yuan added 1.2 percent against the dollar in the third quarter, while Brazil’s real slumped 15 percent, Russia’s ruble dropped 13 percent and India’s rupee weakened 8.7 percent, data compiled by Bloomberg show. The JPMorgan Nominal Effective Exchange Rate, a trade-weighted index for the yuan, gained 4.5 percent in September, the most since December 1997, increasing the cost of goods made in China.

-- Editors: Anil Varma, James Regan

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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