China Trade Information

The yuan rose the most since China ended its fixed exchange rate to the dollar in 2005 as the government signaled faster gains to cool the economy and curb inflation. 

The currency climbed as much as 0.43 percent after the official China Securities Journal cited Ba Shusong, a cabinet researcher, calling for a stronger yuan to curb prices of imported fuel and food. The central bank Dec. 21 called for the market to play a greater role in setting the exchange rate. 

“The economy is overheating in at least some regions,” Yu Yongding, the director of the World Economics and Politics Institute in Beijing and a former central bank monetary policy committee member said in an interview today. “The central bank now has more room to let the yuan rate float with more flexibility.” 

The yuan strengthened 0.34 percent to 7.3192 per dollar as of 2:52 p.m. in Shanghai, according to the China Foreign Exchange Trade System. The average daily fluctuation this week of 0.27 percent is three times larger than last week’s figure. The currency’s 6.6 percent gain versus the dollar this year is twice as much as last year’s 3.3 percent advance. 

The U.S. trade deficit with China is still set to exceed last year’s record of $232.5 billion, prompting lawmakers including Senator Charles Schumer, a New York Democrat, to propose sanctions unless the yuan controls are loosened. U.S. Treasury Secretary Henry Paulson on Dec. 19 called for faster gains, while refraining from accusing China of manipulating its currency to make exports more competitive.

Inflation Pressures 

While the yuan gained against the dollar this year, it dropped against 7 of the world’s 17 most-active currencies. It slid 3 percent against the euro, 11 percent versus the Canadian dollar and 13 percent against the Brazilian real, pushing up import costs. 

A 10 percent appreciation in the yuan against the dollar would reduce the import prices of oil, soybeans and pork by about 10 percent, Ba, a deputy director at the State Council Development and Research Center, was cited as saying by the China Securities newspaper. 

The central bank said in a Dec. 21 statement it plans “forceful measures” to limit money supply, including a more flexible exchange rate. The market will play a “much” bigger role in setting the yuan’s value, policy makers said after a quarterly monetary policy meeting. 

The CSI 300 Index, which tracks yuan-denominated A shares listed on China’s two exchanges, has almost tripled this year pushing prices to 46 times per-share earnings, more than double that of Hong Kong’s Hang Seng Index. It gained 1.6 percent today.

“We’re seeing some big moves in the yuan,” said David Mann, senior strategist at Standard Chartered in Hong Kong. “It makes sense for them to get more aggressive in addressing the overheating pressures in the economy.” 

The currency will rise to 6.84 by the end of 2008, he said. 

Overheating Economy 

China’s central bank this month raised rates for a sixth time this year to rein in credit growth, and lifted the reserve ratio to the highest in at least 20 years. The economy expanded 11.5 percent in the third quarter and consumer prices rose 6.9 percent in November from a year-earlier. 

The nation’s trade surplus, which surged 52 percent in the 11 months through November to $238.1 billion, has driven foreign-exchange reserves to an all-time-high of $1.46 trillion, making it difficult for the government to slow growth and tame asset-price inflation.

Policy makers discussed widening the yuan’s trading band to 0.8 percent either side of a daily rate fixed by the central bank from 0.5 percent now, the Hong Kong-based Ta Kung Pao newspaper reported last month, citing an unidentified person. 

“Either widening the trading band or another revaluation, the direction of faster appreciation is already set,” former monetary policy maker Yu said. 

Open-Market Operations 

The People’s Bank of China on July 21, 2005, ended a decade-long link to the dollar, letting the currency move in reference to a basket of currencies including the euro, yen, British pound and South Korea’s won. It strengthened the currency by 2.1 percent that day. 

Forward contracts show traders are betting on an 8.6 percent advance in the yuan to 6.7380 in the next 12 months. The median estimate of 28 analysts surveyed by Bloomberg News is for a rate of 6.88 by the end of 2008.

The central bank auctioned 2 billion yuan ($273 million) of three-year bills today at a yield of 4.52 percent. The yield climbed 5 basis points, or 0.05 percentage point, from 4.47 percent on similar-maturity debt sold a week ago. The yield at a three-month bill sale remained unchanged at 3.41 percent. 

Bills Maturing 

“Funds available for debt investments are plenty, keeping the yields on short-term bills stable,” said Nie Shuguang, a fixed-income analyst at Industrial Bank Co. in Shanghai. “Many PBOC bills previously sold are maturing this month, flushing the market with money.” 

The benchmark interbank seven-day repo fixing dropped 10 basis points to 2.28 percent, compared with an average of 3.2 percent this month. The Shanghai interbank offered rate, or Shibor, for two-week funding fell 1 basis point to 2.4 percent. 

The yield on the treasury bond due Nov. 2014 held at 4.35 percent, according to the China Interbank Bond Market. The 4.45 percent security traded at 99.99 per 100 yuan face amount.

Tags: BOC, central-bank, inflation, investment, Peoples-Bank-of-China

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