Yuan Advances Most in Two Months on Dollar's Slump; Bonds Rise

By Judy Chen and Belinda Cao

Sept. 23 (Bloomberg) -- The yuan advanced by the most in more than two months as the dollar slumped on concern the U.S. government's $700 billion bailout plan for the nation's banks will strain public finances and fail to avert a recession.

The Chinese currency rose for a second day after the dollar fell the most in a decade against the currencies of its major trading partners. China has managed the yuan's exchange rate against a basket of currencies, including the euro and the yen, since a peg against the dollar was scrapped in 2005. It has risen 21.5 percent against the dollar since then.

``The dollar's slump increased the yuan's attractiveness,'' said Li Tao, a foreign-exchange trader at Shenzhen Development Bank Co. in Shenzhen. ``But the central bank may still want to keep the exchange rate stable to support growth.''

The yuan strengthened 0.24 percent to 6.8135 a dollar as of 5:30 p.m. in Shanghai, from 6.8300 yesterday, according to the China Foreign Exchange Trade System. It gained as much as 0.29 percent to 6.8099 earlier today, the highest since the end of the dollar peg.

The U.S. Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six major trading partners, slumped 1.97 percent yesterday, the biggest drop since October 1998. It closed at a six-week low of 76.151.

The yuan is allowed to trade by up to 0.5 percent against the dollar either side of the so-called central parity rate, which was set at 6.8009 today.

Unexpected Rate Cut

Premier Wen Jiabao pledged on Sept. 20 that China will strengthen economic controls to maintain steady growth as global financial volatility threatens the nation's economic stability. The central bank cut borrowing costs on Sept. 15 for the first time in six years after the country's economy expanded at the slowest pace since 2005 in the second quarter.

``The unexpected rate cut last week showed the economic slowdown might be worse than we had forecast,'' said Lu Zhengwei, an economist at Industrial Bank Co. in Shanghai. ``The government won't support a quick appreciation of the yuan for the rest of this year.''

China's export orders this quarter were the lowest since July 2005, according to a central bank survey of businesses published yesterday. Policy makers have slowed yuan appreciation versus the dollar to 0.5 percent since the end of June to help exporters weather a decline in global demand. The yuan gained 6.6 percent in the first half.

Bonds Gain

Government bonds due in 10 years rose after the central bank sold one-year bills at lower yields for a second week.

China's central bank sold 100 billion yuan ($14.7 billion) of one-year bills at a yield of 4.0042 percent, compared with 4.0258 percent a week ago, according to a statement on its Web site. The yield on similar-dated bills in open-market auctions had remained at 4.0583 percent this year up to Sept. 6.

``The yields will continue to decline, but very slowly,'' said Nie Shuguang, a fixed-income analyst at Industrial Bank Co. in Shanghai.

The yield on the 4.41 percent treasury bond due in June 2018 dropped 6 basis points to 3.76 percent in Shanghai, according to Bloomberg calculations based on the rate compiled by the nation's debt clearing house yesterday. The price of the security was 105.76 per 100 yuan face amount. A basis point is 0.01 percentage point.

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Belinda Cao in Beijing at lcao4@bloomberg.net.