Yuan's Gain to `Halt' After 5 Percent Advance, Barclays Says

By Patricia Lui

Aug. 29 (Bloomberg) -- China's yuan will gain another 5 percent on a trade-weighted basis in the next 12 months before coming to a ``halt'' when the government changes its policy of allowing the currency to strengthen, said Barclays Plc.

The yuan, also known as the renminbi, is heading for its first monthly loss against the dollar since May 2006, triggering speculation that the government has already abandoned its policy for currency strength to curb inflation to focus on supporting exports with a weaker currency. A trade-weighted index for the yuan that includes the euro and yen reached a record this month, indicating the government's policy for a stronger yuan remains intact, according to Barclays.

``The change in policy focus is yet to come,'' Peng Wensheng, Barclays' chief China economist in Hong Kong, said in an interview yesterday. ``The pace of effective exchange-rate appreciation has remained strong in recent weeks at an annualized rate of above 10 percent in contrast with the depreciation of the renminbi versus the dollar,'' he wrote in a research note today.

China's yuan has gained 0.2 percent against the dollar in the third quarter compared with 7.3 percent against the euro. In the first half of the year, the yuan rose 6.6 percent against the U.S. currency while falling 0.7 percent against the euro.

The yuan fell 0.2 percent to 6.8431 a dollar as of 2:38 p.m. in Shanghai, according to the China Foreign Exchange Trade System, snapping three days of gains. China's currency traded little changed at 10.0835 per euro.

`Biggest in History'

The yuan's advance will come to an end as growth slows and the trade surplus narrows, according to Peng. ``By then, we would have had real effective appreciation of 27 percent since late 2004, the biggest in the history of any major currency,'' he said.

The extent of this appreciation will reduce China's trade surplus from 9.5 percent of gross domestic product in 2007 to 5 percent, Peng wrote in the note.

The yuan will appreciate to ``around 6.6 to the dollar'' in the next 12 months, the research note read, which is already reflected in the offshore non-deliverable forwards.

The one-year offshore non-deliverable forward trades at 6.6550 to the dollar, according to data compiled by Bloomberg. Forwards are agreements in which assets are bought and sold at current prices for settlement at a later specified time and date. Non-deliverable forwards are settled in dollars.

To contact the reporter on this story: Patricia Lui in Singapore at plui4@bloomberg.net