Yuan Advances on Speculation Gains Needed to Curb Trade Surplus

By Judy Chen and Belinda Cao

Sept. 4 (Bloomberg) -- The yuan advanced for the first time in three days on speculation China will strengthen the currency to help shrink the nation's trade surplus and stem inflation.

The Chinese currency extended gains this year to 6.8 percent, almost matching the advance for all of 2007. Shrinking the trade surplus remains a mission China must carry out, Zhu Baoliang, chief economist at the State Information Center, a government research agency, said Sept. 2.

``The capital inflows from the trade surplus are still a threat to inflation,'' said Yang Shengkun, a currency analyst in Beijing at China Citic Bank Co., a unit of China's biggest state investment company. ``When the government is trying to boost exports to sustain growth, the surplus will widen further.''

The yuan pared early losses and climbed 0.07 percent to 6.8383 a dollar as of 2:01 p.m. in Shanghai, from 6.8434 yesterday, according to the China Foreign Exchange Trade System.

China's trade surplus swelled 4 percent to $25.3 billion in July from a year earlier, the first gain in four months, customs bureau figures showed on Aug. 11. Consumer prices climbed 6.3 percent from a year earlier, exceeding the government's 4.8 percent target for 2008.

German Finance Minister Peer Steinbrueck said today Chinese officials didn't pledge a faster appreciation of the yuan during discussions in Beijing this week.

``I didn't get any commitment and if I would have gotten one I wouldn't tell you because I would influence the markets,'' Steinbrueck said in an interview with Bloomberg Television. ``We have to prevent disorderly adjustments and exchange rates should follow economic fundamentals.''

Steinbrueck said on Sept. 1 that the yuan's exchange rate with the euro doesn't reflect fundamentals of the Chinese and European economies.

The yuan's 0.1 percent depreciation as the dollar rallied last month shows ``China is the last remaining bastion of strong currency fundamentals in Asia,'' Richard Yetsenga, a currency strategist at HSBC Holdings Plc in Hong Kong, wrote in a research note today.

The euro has declined 7.1 percent against the dollar since the end of July and the pound has fallen 10.3 percent.

Bonds Little Changed

Government bonds maturing in 10 years and more were little changed after rising for more than three weeks.

``The yields on long-term debt slid too fast in the past few days and tended to stabilize,'' said Zhang Yige, a bond trader with Industrial Bank Co. Ltd. in Shanghai. ``Market sentiment is still bullish about debt, as shown in the advance of higher-yielding corporate debt.''

The yield on the 4.41 percent bond due June 2018 was little changed at 4.1 percent in Shanghai, according to the China Interbank Bond Market. The price of the security held at 102.49 per 100 yuan face amount.

Investors could have made a return of 1 percent on China's bonds since Aug. 13, based on Bloomberg calculations. The yield on the 10-year government debt declined 37 basis points, or 0.37 percentage point since then.

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