Yuan Set for Best Weekly Gain Since May as China Slows Outflow

By Kim Kyoungwha and Belinda Cao

Dec. 12 (Bloomberg) -- The yuan headed for the biggest weekly advance since May on signs China is allowing currency appreciation to prevent global funds from leaving as growth in the world’s fourth-largest economy cools. Bonds rose.

The yuan gained for an eighth day and is the best-performing currency this year in Asia outside Japan. The U.S. Dollar Index slumped this week by the most in at least a decade. China’s Assistant Finance Minister Zhu Guangyao last week vowed to keep the currency at a “reasonable and balanced” level. Forward contracts showed traders scaled back bets on the extent of yuan declines.

“Recent official commentary seems to indicate no desire to see a depreciation of the yuan,” said Emmanuel Ng, a currency strategist with Oversea-Chinese Banking Corp. in Singapore. “We may see a preference for the market to continue to pick up points on dips in the non-deliverable forwards into 2009.”

The currency rose 0.55 percent this week to 6.8435 per dollar as of 1:52 p.m. in Shanghai from 6.8812 on Dec. 5, according to the China Foreign Exchange Trade System.

One-year non-deliverable forward contracts showed an implied rate for the yuan of 7.0803, a decline of 3.3 percent from today’s spot rate, compared with 7.2350 a week ago. Forwards are agreements in which assets are bought and sold at current prices for settlement at a later time.

China’s foreign exchange regulator said yesterday it is “closely monitoring” the development of the global financial crisis and capital flows into and out of the country.

The State Administration of Foreign Exchange will also ease trade financing for small and medium-sized companies as part of measures to support the nation’s exporters and sustain economic growth in 2009, according to a statement posted on its Web site.

The dollar index, which tracks the greenback against currencies of six major trading partners, fell 4 percent to 83.68 this week.

Bonds Advance

Government bonds rose after the finance ministry sold 10- year debt at a yield lower than analysts and traders had expected.

The Ministry of Finance issued 22 billion yuan ($3.2 billion) of notes due in 2018 at 2.9 percent, 7.5 basis points lower than the median estimate in a Bloomberg News survey. A basis point is 0.01 percentage point.

The yield on the 3.68 percent treasury bond due in September 2018 declined eight basis points to 2.89 percent, according to the China Interbank Bond Market. The price of the security climbed 0.71 per 100 yuan face amount to 106.68.

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 percent the past three months.

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

Last Updated: December 12, 2008 01:08 EST