Yuan Trades Near Strongest Since Peg Scrapped; Bonds Advance
China’s yuan held near the highest since a dollar peg was scrapped in 2005 before a report that economists say will show the nation’s trade surplus rose to a record last year as exports surged. Bonds gained.
Some U.S. lawmakers accuse China of deliberately keeping the currency undervalued to boost shipments overseas and have proposed sanctions unless yuan controls are loosened. The central bank has pledged to boost the flexibility of the yuan to also quell inflation at an 11-year high and lower record foreign-exchange reserves, fueled by the export-led economic expansion.
The “yuan’s acceleration pace has picked up over the past three weeks or so despite mixed regional Asian foreign exchange performance,” said Sean Callow, a currency strategist with Westpac banking Corp. in Singapore. “A further burst of yuan gains is probably not far away.”
The yuan was at 7.2638 versus the dollar as of 1:41 p.m. in Shanghai, compared with 7.2643 at yesterday’s close, according to data compiled by Bloomberg.
The yuan’s appreciation against the U.S. dollar is likely to be capped at 10 percent this year, even if the gains quicken noticeably, a senior government researcher wrote in the China Securities Journal.
Record Surplus
A Bloomberg survey of 21 economists showed the trade gap rose 16 percent to $24.4 billion in December from a year earlier. The data may be released as early as today. A stronger yuan may slow demand for China’s exports and cool inflation by making imports cheaper.
“The large trade surpluses is a physical reflection of the need to allow the yuan to appreciate at a faster pace,” said Nizam Idris, a currency strategist with UBS AG in Singapore. The central bank “is keen to curb inflation.”
Government policy makers last month named inflation and the risk that the economy will overheat as its two main concerns for 2008 and said the People’s Bank of China would pursue a “tight monetary policy.”
The yuan will rise to 6.89 per dollar by the end of 2008, according to the median estimate of 31 analysts surveyed by Bloomberg News. Forward contracts show traders are betting on an 8.7 percent advance to 6.6810 in the next 12 months.
Bonds Advance
The yield on the five-year government bond dropped 1 basis point, or 0.01 percentage point, to 4.16 percent in Shanghai, a two-week low, according to the China Interbank Bond Market. The price of the 4 percent security due October 2012 gained 0.4 per 100 yuan face amount to 99.30.
The People’s Bank of China will put more than 1 trillion yuan ($138 billion) of cash into the banking system by redeeming bills that mature this month, said Bai Zhiyong, a fixed-income trader at Jinzhou City Commercial Bank in the northeastern Chinese city of Jinzhou. Banks are the biggest buyers of government debt.
“This is good for the market and demand for bonds may keep rising,” Bai said.
The central bank conducts weekly auctions of bills to drain excess cash from the banking system.
Tags: central-bank, inflation