Yuan Is Little Changed as Easing Prices May Allow Slower Gains

By Bob Chen and Jiang Jianguo

Sept. 10 (Bloomberg) -- The yuan was little changed after gaining yesterday on speculation cooling inflation will give China's central bank more leeway to slow the currency's appreciation and boost export growth. Bonds advanced.

The appreciation in the currency, which is Asia's best performer this year, has stalled this quarter after a 4.2 percent rise in the first three months and 2.3 percent in the second quarter. Consumer prices climbed 4.9 percent in August from a year ago, the slowest pace since June 2007, China's statistics bureau said today. Currency gains hurt exporters by making their products more expensive and reducing demand in overseas markets.

``Inflation coming off will ease the pressure on China to appreciate the yuan,'' said Daniel Soh, an economist at Forecast Pte in Singapore. ``China is concerned about a spike in the unemployment rate in the export sector.''

The currency traded at 6.8392 a dollar as of 1:07 p.m. in Shanghai, versus 6.8381 yesterday, according to the China Foreign Exchange Trade System.

In a sign of weaker growth ahead, China's passenger-car sales fell in August for the first time in more than three years, the China Association of Automobile Manufacturers said yesterday.

Focus on Growth

China's trade surplus unexpectedly widened in August to $28.69 billion from $25.28 billion the previous month, a government report showed today. Economists in a Bloomberg News survey had forecast the surplus would shrink to $23.55 billion. Exports growth in August slowed less than expected while imports growth weakened more than expected.

``The Chinese government has already shifted its focus on growth,'' said Jerry Yoshikoshi, a market analyst with Sumitomo Mitsui Banking Corp. in Singapore. ``We'll continue to see a slower appreciation or flat movement in the yuan.''

China's economy expanded 10.1 percent in the three months ended June 30 from a year earlier, slowing for a fourth straight quarter as exports cooled. Weaker overseas demand, rising costs and a strengthening currency have put pressure on exporters of shoes, toys and clothes.

Non-deliverable forwards contracts indicate the yuan will gain 1 percent to 6.774 per dollar in the next six months. Forwards are agreements in which assets are bought and sold at current prices for future delivery.

Low Yields

Government bonds rose, pushing 10-year yields to the lowest in more than two months, as inflation slowed.

The yield on the 4.07 percent note due March 2018 fell 1 basis point to 4.09 percent, the lowest since July 1, according to the China Interbank Bond Market. The price rose 0.08 per 100 yuan face amount to 99.85. A basis point is 0.01 percentage point.

``This is good news for the bond market,'' said Nie Shuguang, a fixed-income trader at Industrial Bank Co. in Shanghai. Inflation erodes the fixed payments from debt.

Food prices rose 10.3 percent in August from a year earlier after gaining 14.4 percent in July, the statistics bureau said. Non-food prices increased 2.1 percent, the same as the gain in July. Food costs account for about a third of China's consumer price index.

China Development Bank sold 30 billion yuan ($4.39 billion) of 10-year bonds at a 4.28 percent yield today, less than the 4.5 percent some traders had estimated, Nie said. Investors have the option to sell the securities back to the bank at face value after three years. The lender increased the offer size by 50 percent from 20 billion yuan.

To contact the reporters on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net; Jiang Jianguo in Shanghai at jjiang@bloomberg.net