Yuan Gains Most in Seven Months, Erasing Biggest Loss Since Peg

By Belinda Cao and Kim Kyoungwha

Oct. 7 (Bloomberg) -- The yuan rose the most in seven months, erasing a record loss posted in the run-up to last week's break in trading, after the central bank said it wants a stable currency.

The People's Bank of China will focus on ``maintaining the stability of the currency when applying macro-economic controls to the financial sector and formulating monetary policy,'' said Central Bank Governor Zhou Xiaochuan in a statement the agency posted on its Web site yesterday.

The currency rose 0.38 percent to 6.8169 a dollar as of 5:30 p.m. in Shanghai, according to the China Foreign Exchange Trade System. A 0.08 percent gain yesterday followed a 0.46 percent slide on Sept. 26, the biggest drop since a dollar peg ended in July 2005. China's financial markets were closed last week for a public holiday.

``The decline before the holiday was too big, and the government thinks it necessary to stabilize the market,'' said Liu Dongliang, a Shenzhen-based foreign-exchange analyst at China Merchants Bank Co., the country's sixth-largest lender. He predicts the yuan won't strengthen beyond 6.8 a dollar this week.

China's currency is allowed to trade by up to 0.5 percent against the dollar on either side of the so-called central parity rate, which was set at 6.8345 per dollar today.

The yuan gained 0.08 percent in the last three months, the smallest quarterly advance since the peg ended more than three years ago. Gains have slowed as the government shifts its focus to sustaining economic growth.

Smooth and fast economic development in China is a policy that will be of greatest benefit to the global economy, Premier Wen Jiabao said Oct. 6. Governments in Europe are seeking to shore up faltering financial institutions and the U.S. is enacting a $700 billion rescue package as a deepening credit crisis increases the risk of a global recession.

Bonds Rise

Government bonds gained after the central bank sold one- year sterilization bills at a lower yield for the third time this year.

The People's Bank of China issued 80 billion yuan ($11.7 billion) of one-year bills at a yield of 3.9069 percent, 9.7 basis points less than for similar-dated paper sold Sept. 23. The amount sold was 20 billion yuan less.

The yield on similar-dated bills sold by the central bank declined for the first time this year on Sept. 16 following a 0.27 percentage-point cut in benchmark lending rates. The yield has since then dropped 15 basis points in three weekly auctions from the previous 4.0583 percent.

``The central bank will continue to reduce the size of the money-market bill sales and at the same time cut the rates slowly, which will drag down the yields further,'' said Xu Hanfei, a fixed-income analyst at Industrial Bank Co. in Shanghai. ``Monetary policy is easing as economic growth becomes less optimistic.''

China's growth slowed for a fourth straight quarter in the three months ended June 30. The central bank may cut its benchmark deposit rate in the near future, after trimming the one-year lending rate by 0.27 percentage point last month, Xu said.

The yield on the 4.41 percent bond due December 2017 fell 15 basis points to 3.55 percent, according to the China Interbank Bond Market. The price rose 1.19 per 100 yuan face amount to 106.69. A basis point is 0.01 percentage point.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net; Belinda Cao in Beijing at lcao4@bloomberg.net.