By Judy Chen
Dec. 2 (Bloomberg) -- China’s yuan traded at a five-month low on speculation the central bank favors a weaker currency to support exporters two days before U.S. Treasury Secretary Henry Paulson visits Beijing to push for further appreciation.
The People’s Bank of China set the reference rate at 6.8527 per dollar in Shanghai, compared with yesterday’s fixing of 6.8505. The yuan fell as much as 0.5 percent from the central parity rate to 6.8870 per dollar, touching the daily trading limit, after it slid 0.7 percent yesterday, the biggest loss since the central bank ended a fixed exchange rate in 2005.
China slowed the yuan’s appreciation in July as the world’s fourth-largest economy grew at the slowest pace in five years in the third quarter, prompting Premier Wen Jiabao to pledge “forceful and fast” measures to sustain growth. President-elect Barack Obama said China must stop manipulating the currency in a letter to the National Council of Textile Organizations released on Oct. 24.
“The central bank has the intention of weakening the currency but is also worried about excessive reactions in the market,” said Yang Shengkun, a currency analyst in Beijing at China Citic Bank Co., a unit of China’s biggest state investment company. “The reference rate today signals it doesn’t want to see a big drop in the yuan’s value.”
The yuan traded at 6.8867 a dollar as of 2:27 p.m. in Shanghai, from 6.8848 yesterday, according to the China Foreign Exchange Trade System. The currency is allowed to trade by up to 0.5 percent against the dollar either side of the parity rate.
Policy Change?
Paulson will reiterate the urgency for China to allow its currency to appreciate when he visits Beijing on Dec. 4 and 5, his top international aide said yesterday.
“The currency reform agenda is as important now as it ever has been,” David McCormick, the Treasury’s undersecretary for international affairs, said at a briefing with reporters in Washington. “We’ve had no indication in our talks from China that it is any less committed to this.”
The fifth round of Strategic Economic Dialogue convenes before Obama takes office in January. Paulson has refrained from accusing China of manipulating the yuan, while lawmakers, including Senator Charles Schumer, a New York Democrat, proposed sanctions unless currency controls are loosened.
China’s Assistant Finance Minister Zhu Guangyao said on Nov. 27 the government will stress the need to maintain exchange-rate stability during current turbulence in the meeting with the U.S.
“Paulson will insist on more appreciation, but China will choose its own way,” said Ka Chung Law, a strategist at the Hong Kong branch of Bank of Communications Ltd., China’s fifth-biggest lender. “The government will let the yuan fall at least 10 percent to boost exports.”
Forward Contracts
Central bank Governor Zhou Xiaochuan said on Nov. 10 that he can’t rule out the possibility of weakening the currency to boost the economy as China’s export growth slowed to 19.2 percent in October, the least in four months.
“There are indications that the Chinese are moving toward a more accommodative policy on the yuan,” said Dwyfor Evans, a strategist at State Street Global Markets in Hong Kong. “The weak export outlook is central to this policy change.”
The yuan has fallen 0.47 percent since June 30 after gaining 6.6 percent in the first half. It has climbed 20 percent since a peg against the dollar was abandoned in July 2005.
Non-deliverable forward contracts show the yuan will depreciate 4.5 percent to 7.21 per dollar in six months and 6 percent to 7.3250 in a year. Forwards are agreements in which assets are bought and sold at current prices for settlement at a later-specified time. Non-deliverable contracts are settled in dollars rather than the underlying asset.
“We still need to watch a few more days to determine whether it’s really a new trend,” said Shi Lei, a currency analyst at Bank of China Ltd., the country’s biggest foreign currency trader. “Devaluing the currency would be China’s last option to support the economy.”
Bonds Gain
Chinese government bonds due in three years and less rose after the People’s Bank of China suspended auctions of one-year bills in open-market operations from this week. A notice posted on the central bank Web site didn’t say how long the suspension will last.
“The suspension of the PBOC bills sale, which reduced supply of short-term securities, sent the yields on short-term government notes down,” said Nie Shuguang, a fixed-income analyst at Industrial Bank Co. in Shanghai. “Longer-term bonds were relatively stable.”
The yield on the 4.89 percent note due May 2011 dropped 5 basis points to 1.85 percent, according to the China Interbank Bond Market. The price of the security rose 0.13 per 100 yuan face amount to 107.28.
The central bank last sold one-year bills on Nov. 18 at a yield of 2.2495 percent, the lowest this year. Similar-dated bills yielded 1.88 percent today on the Interbank Bond Market.
To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net
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