Yuan Poised for Second Weekly Gain as China Favors Stability

By Judy Chen and Jiang Jianguo

Dec. 19 (Bloomberg) -- The yuan headed for a second weekly gain against the dollar after China signaled it won’t pursue a weaker currency to help exporters survive a global recession.

Commerce Minster Chen Deming said yesterday that China should stick with a stable yuan and refrain from using the exchange rate to boost overseas sales. The yuan slumped 0.7 percent in the first five days of this month, the most since the end of the fixed exchange rate in 2005, prompting traders to step up bets the currency would extend declines.

“The gains in the past two weeks show China doesn’t intend to weaken its currency,” said Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp., the nation’s second- largest lender. “China will continue to have a trade surplus, which is the best argument against depreciation.”

The yuan fell 0.08 percent to 6.8347 a dollar as of 11:49 a.m. in Shanghai, from 6.8295 yesterday, according to the China Foreign Exchange Trade System. It has gained 0.12 percent this week and is up 6.9 percent for the year.

China’s trade surplus widened to a record $40.1 billion in November, from $35.2 billion the previous month, official figures show. The trade gap may exceed $280 billion this year, the National Development and Reform Commission said Dec. 16.

The yuan is allowed to trade by up to 0.5 percent against the dollar either side of the daily reference rate, which was set at 6.8357 today.

The U.S. Dollar Index traded on ICE futures in New York, which tracks the greenback against those of six trading partners, rose for a second day to 79.57, after slumping 8.8 percent since Dec. 9. Eight out of the 10 most-active currencies in Asia outside Japan declined against the greenback today.

“The dollar’s liquidity may shrink in the holiday season starting from next week, which will put downward pressure on the yuan,” said Huang Yi, a foreign-exchange trader at Guangdong Development Bank Co. in Guangzhou.

Bonds Little Changed

Bonds were unchanged, with 30-year yields holding at a one- month low, after the government cut fuel prices for the first time in almost two years, cooling inflation that erodes the purchasing power of the fixed payments on debt.

The yield on the 3.91 percent bond due October 2038 was 3.60 percent, the lowest since Nov. 13, according to the China Interbank Bond Market. The price was 105.64.

The reductions will “help accelerate declines in consumer prices and give the central bank room to lower interest rates, which is good for the bond market,” said Liang Futao, research manager at Changjiang Pension Insurance Co. in Shanghai.

Bank of China Governor Zhou Xiaochuan reiterated yesterday the nation faces pressure to cut interest rates “based on the inflation outlook.”

China’s consumer prices rose 2.4 percent in November from a year earlier, the smallest increase in almost two years. China’s bonds have gained 11 percent this year, according to Asian local- currency debt indexes compiled by HSBC Holdings Plc.

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Jiang Jianguo in Shanghai at jjiang@bloomberg.net