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Yuan gains 20perc since end of peg { May 2008 } Original Source Link: (May no longer be active)
http://www.bloomberg.com/apps/news?pid=20601080&sid=aWxhTZmEphSE&refer=asiahttp://www.bloomberg.com/apps/news?pid=20601080&sid=aWxhTZmEphSE&refer=asia
Yuan Extends Gains to 20% Since End of Peg Before Paulson Talks
By Judy Chen and Kim Kyoungwha
June 17 (Bloomberg) -- The yuan extended gains to 20 percent since China ended a fixed exchange rate to the dollar in July 2005, easing trade tensions with the U.S. as Treasury Secretary Henry Paulson prepares to meet with Chinese officials.
The currency climbed for a fifth day, reaching 6.8909 per dollar. The yuan's advance since the peg was scrapped compares with a 29 percent gain for the euro against the dollar, 13.2 percent for the British pound and 4.7 percent for the Japanese yen. China has allowed faster appreciation this year to curb import costs and slow inflation. The talks in Annapolis, Maryland today and tomorrow will focus on energy and the environment rather than the currency.
``Yuan appreciation is the only viable choice for containing accelerated inflation,'' said Claudio Piron, a currency strategist with JPMorgan Chase & Co. in Singapore. ``China is getting a break from foreign pressure.''
The currency climbed 0.13 percent to 6.8915 a dollar in Shanghai as of 5:30 p.m., from 6.9004 yesterday, according to the China Foreign Exchange Trade System. It's risen 1.7 percent this quarter compared with a 4.2 percent advance in the previous three months.
The yuan may rise to 6.5 by the end of 2008 and register another 20 percent appreciation by the end of 2012, said Piron. Goldman Sachs Group Inc. said in a report yesterday that the yuan will gain about 10 percent in a year as China stems inflation that slowed to 7.7 percent in May from the almost 12- year high of 8.5 percent in April.
Trade Surplus
China's trade surplus, which rose to a record in 2007, narrowed in May for the first time in five months as a stronger yuan slowed export growth. Foreign-exchange reserves still surged 40 percent to $1.68 trillion in March, flooding the economy with cash and fueling inflation. The central bank has ordered banks to set aside bigger reserves five times this year after raising interest rates six times last year.
China needs to move ``more quickly'' on yuan appreciation and exchange-rate reform will be ``critical'' to the country's social stability, said Paulson on June 10 in Washington.
The currency has fallen 6.7 percent against the euro since the dollar link was abandoned, lagging behind its gains versus the dollar, prompting European officials to seek faster yuan gains versus the euro.
The Westpac Nominal Effective Exchange Rate, a trade- weighted index for the yuan that includes the euro and the yen, has climbed 5.7 percent so far this year, compared with the 3.4 percent gain for all of 2007. The yuan was little changed against the euro this year.
European Outlook
``We are expecting to continue to see trade-weighted appreciation,'' said David Mann, a senior currency strategist at Standard Chartered Plc in Hong Kong.
European Union Trade Commissioner Peter Mandelson on June 12 said that the region needed to ``find ways to handle'' the pressure of competing with China, stopping short of criticizing its currency policy.
China's central bank said yesterday in a report that investors' expectations for continued appreciation of the yuan are attracting inflows of ``hot money,'' and should such expectations turn around, a ``massive outflow'' of money will affect China's financial security.
China will strengthen monitoring of money inflows after the surplus for the capital and financial account, a measure of investment flows, jumped more than seven-fold in 2007 to $73.5 billion from $10 billion a year earlier, the State Administration of Foreign Exchange said on June 5.
Two-Way Moves
The People's Bank of China may ``unexpectedly adjust the pace of yuan appreciation, like the stagnation in April, to deter investors betting on one-way appreciation,'' said Yang Shengkun, a currency analyst in Beijing at China Citic Bank Co., a unit of China's biggest state investment company.
China slowed yuan gains to 0.35 percent in April, the smallest monthly advance in more than a year, prompting traders to pare bets for the extent of yuan appreciation in the next 12 months. Inflows of ``hot money'' into China may have reached $500 billion last year due to trade, investment and firms borrowing abroad, according to research by Shanghai Securities Co. published in the China Securities Journal.
One-year non-deliverable forwards contracts, agreements in which assets are bought and sold at current prices for future delivery, show traders are betting on a 6.4 percent rise in the yuan to 6.4794 in the next 12 months. The yuan will reach 6.65 per dollar by year-end, according to the median estimate of 23 analysts surveyed by Bloomberg News.
Bonds Little Changed
Government bonds were little changed after funding costs in the money market stabilized.
``Buyers and sellers seemed to be in a tie,'' said Nie Shuguang, a fixed-income analyst at Industrial Bank Co. in Shanghai. ``Investors have very different forecasts as to where the yields should go later this month.''
The seven-day repo fixing rate, a measure for lending costs in the money market dropped 0.12 percentage point to 3.35 percent today, according to the National Interbank Funding Center. The rate slid from 4.995 percent on June 10, the first trading day after the central bank ordered lenders to set aside 1 percentage point more of their deposits as reserves, to be paid June 15 and 25.
The central bank sold 9 billion yuan ($1.3 billion) in one- year sterilization bills in the open-market operations, the least amount in similar-dated sales since November.
``The central bank bills are not very welcome these days due to the tightening,'' Nie said.
The yield on the 4.01 percent treasury note due May 2015 was little changed at 4.14 percent, according to the China Interbank Bond Market. The price of the security was 99.22 per 100 yuan face amount.
Last Updated: June 17, 2008 06:04 EDT
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