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Yuan Rises Most Since End of Peg as China Seeks to Curb Prices
By Belinda Cao
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Dec. 27 (Bloomberg) -- The yuan rose the most since China ended a fixed exchange rate to the dollar in 2005 as the government signaled it will allow 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 researcher for the cabinet, 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, director of 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 0.35 percent to 7.3186 per dollar as of 12:26 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. The currency's 6.6 percent gain versus the dollar this year is twice as much as last year's 3.3 percent advance.
``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.
Inflation Pressures
U.S. Treasury Secretary Henry Paulson on Dec. 19 urged the nation to allow faster gains whilst refraining from naming China a currency manipulator. Senator Charles Grassley, a Republican from Iowa, and other lawmakers are threatening punitive legislation unless China's government loosens yuan controls.
While the yuan gained against the dollar this year, it dropped against 7 of the world's 17 most-active currencies. It slid 2.8 percent against the euro, 10.2 percent versus the Canadian dollar and 13 percent against the Brazilian real, making China's exports more competitive in those markets and pushing up the cost of importing commodities.
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 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.
Trade Surplus
China's trade surplus, which surged 52 percent in the 11 months through November to $238.1 billion, has driven the country's foreign-exchange reserves to an all-time-high of $1.46 trillion, making it difficult for the government to slow growth. 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 leaders discussed widening the yuan's daily trading band to as much as 0.8 percent on either side of the so- called parity rate from the current 0.5 percent, the Hong Kong- based Ta Kung Pao newspaper reported last month, citing an unidentified person.
``The talk is they're going to introduce a faster pace of gains, and it's looking like they're going to finish the year on a firmer note for the yuan,'' said Gundy Cahyadi, an economist at Ideaglobal in Singapore.
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.
In the bond market, the People's Bank of China auctioned 2 billion yuan ($273 million) of three-year bills today at a yield of 4.52 percent. The yield 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
``It suggests the 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 central bank also drained 77 billion yuan from the interbank market today with seven-day and one-month repurchase agreements.
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.
-- With reporting by Jake Lee in Hong Kong. Editor: Jake Lee, Sandy Hendry
To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net
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