Yuan Rises a Sixth Day as China Seeks to Slow Capital Outflows

By Belinda Cao

Dec. 10 (Bloomberg) -- The yuan rose for a sixth day on signs the central bank is allowing currency appreciation to encourage investors to keep money in the nation as the global economic slowdown deepens.

The run of gains in the yuan was the longest since June as a government report today showed foreign direct investment fell 36.5 percent to $5.3 billion in November, the least in 14 months. Forwards contracts showed traders scaled back bets for how far the currency will depreciate over the next 12 months.

“I heard that our customers were asked to give more detailed reasons for sending money out of the country,” said Guo Zhaoyang, a foreign-exchange strategist at China Everbright Bank Co. in the southern city of Guangzhou. “Regulators do have concerns about capital outflows.”

The currency rose 0.15 percent to 6.8635 per dollar as of 12:02 p.m. in Shanghai, the strongest level since Dec. 3, 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 6.8475 today.

U.S. Treasury Secretary Henry Paulson said last week China is still committed to appreciation of the yuan over time during his visit in Beijing for the biannual Strategic Economic Dialogue.

One-year yuan forward contracts rose for a fourth day, to 7.09, compared with 7.1050 yesterday, according to data compiled by Bloomberg.

Record Drop

The yuan declined 0.67 percent last week, the most since a dollar peg ended in July 2005. The currency fell by the daily limit of 0.5 percent from the central bank’s reference rate in the first four trading days of last week.

“People started to sell the yuan and buy dollars in a panic flight after the central bank let the yuan fall sharply last Monday,” said Shi Lei, an analyst with Bank of China Ltd. in Beijing. “I don’t think the central bank really wants the yuan to depreciate.”

Government bonds due in five years and more fell for a third day, on speculation investors expect the economy may rebound as early as one year from now.

“Many people expect the economy will rebound in one year’s time, making them more cautious about buying long-term debt,” said Pang Aihua, a Beijing-based bond analyst at China Citic Bank.

Debt Demand Decline

Demand for long-term bonds also declined because banks, major buyers of debt with long maturities, have already filled their annual investment plan toward the end of the year, according to Shi at Bank of China. “They won’t come back and start buying again until they make investment plans for the new year.”

The yield on the 3.69 percent treasury note due in April 2013 rose 6 basis points to 2.16 percent, according to the China Interbank Bond Market. The price of the security dropped 0.28 per 100 yuan face amount to 106.28. A basis point is 0.01 percentage point.

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