China’s Yuan Gains for 7th Day as Policy Makers Seek Stability

By Belinda Cao and Kim Kyoungwha

Dec. 11 (Bloomberg) -- The yuan rose for a seventh day, the longest winning streak since June, on speculation policy makers are seeking stability in the currency to prevent sudden capital outflows as economic growth slows.

The yuan has trimmed more than half of its losses after dropping on Dec. 1 by the most since China ended a dollar peg in 2005. Assistant finance minister Zhu Guangyao last week vowed to keep the currency at a “reasonable and balanced” level. China stalled yuan appreciation since June to aid exporters after letting it rise 6.6 percent in the first half. A report yesterday showed sales abroad fell for the first time in seven years.

“The yuan will be kept relatively stable as the government won’t like to see the currency rise or fall too rapidly in the near term,” said Liu Xin, a Hong Kong-based currency analyst with Bank of Communications Ltd. “Still, we expect the currency will weaken next year as it will help with employment at struggling companies which were hurt by a strong currency.”

The currency rose 0.14 percent to 6.8540 a dollar as of 12:25 p.m. in Shanghai, according to the China Foreign Exchange Trade System. The yuan is Asia’s best performer this year among the 10 most-traded regional currencies outside Japan.

Twelve-month non-deliverable forwards indicated the yuan will weaken 3.4 percent to 7.09 to the dollar in a year, according to Bloomberg data. Forwards are agreements in which assets are bought and sold at current prices for settlement at a later time.

Shipments from China declined 2.2 percent in November from a year earlier, the customs bureau said yesterday. Imports plunged 17.9 percent. Inflation cooled to the weakest pace in almost two years, the statistics bureau said today, signaling growth is slumping in the world’s fourth-biggest economy.

‘Urgency of Reform’

U.S. Treasury Secretary Henry Paulson yesterday reiterated his call for a faster rate of appreciation, in his final semiannual report on foreign-exchange policies. He refrained from accusing China of unfairly managing its currency.

“The pace of appreciation in early 2008 needs to be resumed,” the Treasury said in the report. “Treasury continues to use every opportunity to impress upon Chinese authorities the importance and urgency of exchange-rate reform.”

Government bonds fell for a fourth day on speculation banks and mutual funds are reducing debt investments before they close their book at the end of the year.

China’s bonds handed investors a return of almost 10 percent this year, Asia’s third-best advance, according to Asian local- currency debt indexes compiled by HSBC Holdings Plc. They rose 6.1 percent the past three months.

Steepened Curve

“Most banks and mutual funds have filled their investment plan for the year and are reluctant to increase debt holdings at this point,” said Li Huaiding, a bond analyst at Everbright Securities Co. in Shanghai. “The yields, especially those for longer-dated debt, have gone up this week after quick declines in the past months.”

The yield on the 2.66 percent treasury note due in August 2010 rose five basis points to 1.4 percent, according to the China Interbank Bond Market. The price of the security dropped 0.09 per 100 yuan face amount to 102.09. A basis point is 0.01 percentage point.

China’s bond yield curve steepened the past month after returns on debt due in 10 to 15 years climbed while those on shorter-dated notes slid, a sign the world’s fourth-largest economy may rebound next year. The difference between 10-year and one-year bond yields increased yesterday to 167 basis points, the widest this year, from 61 basis points a month ago.

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