By Kim Kyoungwha and Belinda Cao
Dec. 8 (Bloomberg) -- Yuan forwards rose for a second day as traders scaled back bets on declines in the Chinese currency after Assistant Finance Minister Zhu Guangyao said last week China will keep the yuan stable. Government bonds gained.
China will keep the yuan at a “reasonable and balanced” level, and the nation will “better manage” market currency expectations, Zhu said Dec. 5 after the fifth China-U.S. Strategic Economic Dialogue in Beijing. Twelve-month yuan forward contracts fell by a record 3.3 percent versus the dollar on Dec. 1, while the spot rate slumped 0.7 percent, the most since China ended the peg to the U.S. currency July 2005.
“It is too early to be sure, but it may just be that the Chinese authorities are just tapping the brakes on the pace of the yuan’s up trend rather than seeking a reversal,” said Sean Callow, a senior currency strategist in Sydney with Westpac Banking Corp. “At this point, we are inclined to view the extent of the non-deliverable forward reaction as excessive.”
The currency traded at 6.8809 a dollar in Shanghai as of 11:05 a.m., compared with 6.8812 on Dec. 5, according to the China Foreign Exchange Trade System. The yuan is allowed to trade by up to 0.5 percent against the dollar either side of the so-called central parity rate, which was set at 6.8509 today.
Twelve-month non-deliverable forwards gained 0.7 percent to 7.1350 a dollar. Forwards are agreements in which assets are bought and sold at current prices for settlement at a later time. Non-deliverable contracts are settled in dollars.
China will continue to let the market play a “primary role” in establishing the value of its currency, Zhu made the comments in a press briefing after the two-day talks. U.S. Treasury Secretary Henry Paulson said the same day that China is still committed to the appreciation of the yuan over time.
Adviser on Yuan
China is “highly unlikely” to favor a weaker yuan because the government will rely more on spurring domestic demand than exports to support the economy, a former adviser to the central bank said.
“I regard the recent devaluation just a blip,” Yu Yongding said in an e-mail interview. “The export sector can and should be helped by means other than devaluation. Why should China do something that is not in its long-term interests and whose impact in the short-run is uncertain?”
China “should be happy” that its trade surplus is heading to a more balanced level, he said.
Bonds Advance
Government bonds rose after money market rates declined to the lowest this year, making it cheaper for investors to buy debt with borrowed funds. The central bank cut the reserve ratio for six major lenders by 1 percentage point and 2 percentage points for smaller ones, effective Dec. 5.
The seven-day repurchase rate, which measures borrowing costs between banks in China, declined 25 basis points, the most since Nov. 27, to 1.6 percent as of 10:27 a.m. in Shanghai. The rate slumped 53 basis points the day after China cut benchmark lending rates for a fourth time on Nov. 26 to spur the economy.
“Bonds, especially those with shorter maturities, continued to rise on ample funding availability,” said Chen Liang, a fixed-income analyst with Guohai Securities Co. in Shenzhen. He said the reduction in banks’ reserve ratio would be equivalent to a cash injection of 500 billion ($72.66 billion) to 600 billion yuan into the financial system.
The yield on the 3.9 percent note due August 2014 dropped 7 basis points to 2.34 percent, according to the China Interbank Bond Market. The price of the security rose 0.38 per 100 yuan face amount to 108.23.
To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net; Belinda Cao in Beijing at lcao4@bloomberg.net.
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