China's Yuan Forwards Offer `Clear Value,' Says HSBC

By Judy Chen and Kim Kyoungwha

Aug. 7 (Bloomberg) -- Yuan forward contracts offer ``clear value'' after adjustments to China's currency policy prompted traders to rein in their expectations for further appreciation, said HSBC Holdings Plc.

The government has in the past two weeks said supporting economic growth is as important as fighting inflation, fueling speculation currency gains will be kept in check to aid exporters. The State Administration of Foreign Exchange, China's top currency regulator, yesterday announced new rules to clamp down on inflows of so-called hot money, speculative capital brought in to the country to profit from currency gains.

Non-deliverable forwards show the yuan will reach an implied rate of 6.5952 per dollar in the next 12 months, a gain of 4 percent from the current exchange rate. Two weeks ago the contracts, which are settled in dollars and allow traders to bet on the future value of China's currency, were predicting a 5.3 percent advance and at the start of last month they were pricing in a 6.4 percent strengthening.

``We expect that improved clarity about the policy stance, which may not be available until after the Olympics in China, will see the momentum in the forwards turn towards re-pricing yuan appreciation,'' wrote Richard Yetsenga, a Hong Kong-based currency strategist at HSBC Holdings Plc. in a research note today.

`Necessary' Appreciation

The yuan fell 0.17 percent to 6.8601 versus the dollar as of 5:02 p.m. in Shanghai, extending its drop since the start of last week to 0.6 percent, according to China Foreign Exchange Trade System. It climbed 6.5 percent this year, the biggest gain among Asia's 10 most-traded currencies outside of Japan.

The commerce ministry asked China's cabinet to slow the pace of yuan appreciation to help exporters weather a global economic slowdown. The nation's trade surplus, which reached a record $262 billion last year, shrank 12 percent from a year earlier to $99 billion in the first half.

``The pace of appreciation may slow temporarily, but the currency is too cheap, judging by the size of the trade surplus,'' said Ben Simpfendorfer, an economist with Royal Bank of Scotland Plc in Hong Kong, in an interview today. ``Further appreciation is necessary.''

The rule changes announced yesterday by the currency regulator, designed to hamper inflows and make it easier to send money overseas, mark the first major reforms to China's currency policy since 1997, the economist said. Yuan gains since a peg to the dollar was scrapped in July 2005 have drawn speculators, helping boost the nation's foreign-exchange reserves to a record $1.8 trillion at the end of June.

Hot Money Crackdown

``On balance, these measures could reduce demand for the yuan from legitimate business needs, which could probably ease pressure for appreciation on the margin,'' Ken Peng, an economist with Citigroup Inc. in Shanghai, wrote in a report today. ``But the expectation for later appreciation should not be much affected.''

The government may take ``necessary safeguarding and control'' measures to cope with an imbalance in international payments or economic crisis, the regulator said yesterday. China started a crackdown on hot money last month by setting up an electronic network to monitor export income and prevent capital flowing in through bogus contracts.

Yesterday's announced rule changes granted companies and individuals more flexibility in outbound investments, easing control on capital outflows, said the regulator. The new rules also canceled a previous requirement for companies to repatriate and sell foreign-currency earnings to local banks, according to SAFE.

The yuan will end this year at 6.63 against the dollar, according to the median estimate in a survey of 26 analysts by Bloomberg News. It has depreciated 0.1 percent since the end of June, following gains of 4.2 percent and 2.3 percent in the first and second quarters.

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Kim Kyoungwha in Beijing at kkim19@bloomberg.net.