Oct. 25 (Bloomberg) -- The yuan advanced the most in almost two weeks as the central bank set a record reference rate, spurring speculation policy makers are favoring currency gains to tame inflation as economic growth moderates.
The People’s Bank of China set its daily reference rate 0.2 percent stronger at 6.3425 per dollar, the highest level since a peg ended in July 2005. The nation must continue efforts to control food and housing prices to ease inflation and maintain economic development and social stability, Premier Wen Jiabao said on Oct. 22. Consumer prices rose 6.1 percent last month from a year earlier, after gaining 6.2 percent in August, while the economy expanded 9.1 percent in the third quarter, the least since 2009, according to government data.
“Today’s fixing shows they are maintaining a gradual appreciation to help contain inflation,” said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd. “Yuan appreciation will be better than other policies. The side effects of it will be less harmful than a rate hike.”
The yuan strengthened 0.24 percent, the most since Oct. 12, to 6.3604 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency is allowed to trade up to 0.5 percent on either side of the daily reference rate.
The currency is Asia’s best-performing this year, excluding the yen, with a 3.8 percent gain, compared with a 9.9 percent slide in India’s rupee and a 3.3 percent loss in Taiwan’s dollar.
Prudence Investment Management (Hong Kong) Ltd. is boosting holdings of dim-sum bonds, betting China will allow the yuan to appreciate as much as 5 percent in the next 12 months as the economy avoids a slump, managing partner Yuan Wang said at the Bloomberg Link China Conference today.
Steve Wang, head of fixed-income research at BOCI Securities Ltd., a unit of China’s third-biggest lender by market value, also said the yuan will continue to gain 3 percent to 5 percent annually and he favors dim-sum debt sold by state- backed companies.
Twelve-month non-deliverable forwards rose 0.2 percent to 6.3915 per dollar, a 0.5 percent discount to the onshore spot rate. In Hong Kong’s offshore market, the yuan strengthened 0.1 percent to 6.4055.
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