Bloomberg News

Yuan Forwards Advance as Central Bank Vows to Tackle Inflation

November 16, 2011

Nov. 16 (Bloomberg) -- Yuan forwards gained the most in a week after the central bank said China was still facing inflationary pressure, spurring speculation policy makers will tolerate a stronger currency.

China can’t loosen control over prices, the People’s Bank of China said in a statement today. The country still faces “extremely loose” global monetary conditions, the monetary authority said, adding it will continue with exchange-rate reform. Consumer prices rose 5.5 percent in October from a year earlier, less than the 6.1 percent in September although still above the government’s full-year target of 4 percent, official data showed last week.

“The central bank’s comments show that the government still favors a stronger currency to curb inflation,” said Stella Lee, the Hong Kong-based president of Success Futures & Foreign Exchange Ltd. “It’s a bit surprising to investors as they’ve been expecting policy easing in the past two weeks.”

Twelve-month non-deliverable forwards rose 0.21 percent to 6.3341 per dollar as of 5:08 p.m. in Hong Kong, a 0.2 percent premium to the onshore spot rate. The yuan trading in the city gained 0.06 percent to 6.3535.

The yuan in Shanghai closed little changed at 6.3456, according to the China Foreign Exchange Trade System. The currency has gained 4 percent this year, the best performance among the 10 most-traded Asian currencies.

Responsible Policy

The People’s Bank of China set its daily reference rate at 6.3509 per dollar, the weakest level since Oct. 24. The yuan is allowed to trade up to 0.5 percent on either side of the daily reference rate.

China will have to take measures to protect its companies’ interests if the U.S.’s proposed currency bill is passed into law, Commerce Minister Chen Deming said in an interview with China Central Television posted on the ministry’s website yesterday. U.S. President Barack Obama kept up his pressure on China’s foreign-exchange policy and trade practices on Nov. 14, saying “enough is enough” on what the U.S. views as a too-slow appreciation of the yuan.

President Hu Jintao told Obama in a Nov. 12 meeting that a large appreciation won’t solve U.S. problems and China’s foreign-exchange policy is a “responsible” one, a statement on the Chinese Foreign Ministry’s website said. The Senate adopted legislation on Oct. 11 that would let U.S. companies seek duties in compensation for what many lawmakers say is an undervalued currency.

“The fixing in the past two days had certain political undertones to it as it followed very loud criticism from President Obama,” said Sacha Tihanyi, a Hong Kong-based currency strategist at Scotia Capital, the investment banking unit of Bank of Nova Scotia. “It may be China sending the message, as has been the case in the past, that overly direct criticism of its currency policy is counter-productive.”

--Editors: Andrew Janes, James Regan

To contact the reporter on this story: Kyoungwha Kim in Beijing at kkim19@bloomberg.net; 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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