Yuan Jumps Most in Month as China to Curb Inflation; Bonds Rise

By Aaron Pan and Jiang Jianguo

Aug. 28 (Bloomberg) -- The yuan rose the most in a month on speculation China is seeking to temper inflation through currency gains and as the dollar declined in Asia.

China's currency advanced for a third day after Xinhua news agency reported curbing inflation is a priority for the government for the rest of the year, citing National Development and Reform Commission Vice Chairman Zhu Zhixin. Seven of Asia's 10 most-active currencies outside Japan strengthened against the dollar as the currency dropped versus the euro.

``There's been an appreciation in the yuan on the back of the dollar weakening,'' said Steven Chang, vice president for global markets at State Street Bank & Trust Co. in Hong Kong. ``China policy makers haven't changed their stance on maintaining yuan strength.''

The yuan rose 0.17 percent to 6.8262 per dollar as of 12:03 p.m. in Shanghai from 6.8380 yesterday, according to the China Foreign Exchange Trade System. That's the steepest gain since July 29.

The central bank set a stronger reference rate for today's trading of 6.8326. The yuan is allowed to trade by as much as 0.5 percent against the dollar either side of the reference rate.

The central bank manages the exchange rate against a basket of currencies, including the yen and the euro, after scrapping a peg to the dollar in 2005.

Post-Olympics Slowdown?

The yuan has been little changed in recent weeks on speculation China will pursue a more moderate pace of appreciation to safeguard against a post-Olympics slowdown in the economy. The People's Bank of China said Aug. 15 it will ``fine-tune'' policies to strike a balance between maintaining growth and curbing inflation.

Government bonds rose, pushing seven-year yields to the lowest in more than two months, on speculation inflation eased in August from a year earlier.

The yield on the 4.01 percent note due May 2015 fell 7 basis points to 4.05 percent, the lowest since June 25, according to the China Interbank Bond Market. The price rose 0.38 per 100 yuan face amount to 99.73. A basis point is 0.01 percentage point.

``The August inflation rate may have slowed to about 5 percent because of declining food prices, so this is good news for the bond market,'' said Nie Shuguang, a fixed-income analyst at Industrial bank Co. in Shanghai. Inflation erodes the fixed payments on debt.

Average vegetable prices were 7.9 percent lower than a year earlier last week and grain prices were little changed, the Ministry of Commerce said Aug. 26 on its Web site. Food costs account for about a third of China's consumer price index.

China's annual inflation was 6.3 percent in July, the slowest pace in 10 months. The government is due to report August inflation on Sept. 11.

To contact the reporters on this story: Aaron Pan in Hong Kong at Apan8@bloomberg.net; Jiang Jianguo in Shanghai at jjiang@bloomberg.net.