Bloomberg News

Yuan Forwards Advance on Stimulus Speculation; Spot Weakens

July 19, 2012

Yuan forwards in Hong Kong gained on speculation that China will soon announce measures to revive economic growth as inflation eases. The spot rate in Shanghai snapped a three-day advance.

Premier Wen Jiabao will probably cut banks’ reserve requirements and encourage corporate lending as the cabinet meets to discuss boosting growth, the swap market indicates. Nomura Holdings Inc. said the State Council may detail easing measures this week. Inflation in July may climb less than 2 percent, the slowest pace since January 2010, China Securities Journal said in a front page commentary today. Foreign direct investment dropped 3 percent in the first six months from a year earlier, the commerce ministry said July 17.

“Given reviving growth is a priority, China has to implement policies that encourage investment, which could spur some demand for the yuan,” said Daniel Chan, executive vice- president at Glory Sky Global Markets Ltd. in Hong Kong. “Yet, the yuan won’t appreciate much because the government also wants to safeguard export growth.”

Twelve-month non-deliverable forwards climbed 0.04 percent to 6.4135 per dollar as of 4:58 p.m. in Hong Kong, according to data compiled by Bloomberg. The contracts are at a 0.6 percent discount to the spot rate in Shanghai.

The yuan weakened 0.05 percent to close at 6.3734 per dollar in the onshore market, according to the China Foreign Exchange Trade System. One-month implied volatility, a measure of exchange-rate swings used to price options, was unchanged at 1.35 percent. In Hong Kong’s offshore market, the yuan was steady at 6.3720 per dollar.

Overseas investment in the world’s second-largest economy has declined as China’s growth cooled to the slowest pace in three years in the second quarter. Gross domestic product expanded 7.6 percent from a year earlier, official data showed July 13.

The People’s Bank of China set the currency’s reference rate 0.02 percent stronger at 6.3126, raising it for the fourth day to the highest level since July 4. The currency is allowed to trade as much as 1 percent on either side of the fixing.

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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