Dec. 5 (Bloomberg) -- Yuan forwards advanced the most since the end of the dollar peg in 2005 as China pledged to maintain stability in the currency. Bonds rose.

Twelve-month contracts showed traders scaled back bets for declines in the currency as Assistant Finance Minister Zhu Guangyao said today that China will keep the yuan stable, at a reasonable and balanced level. The comments eased speculation that authorities are seeking depreciation to boost exports. Zhu also said the nation will “better manage” market currency expectations as the yuan slid 0.7 percent this week, the biggest loss since the peg ended.

“The remarks show the government is trying to keep the yuan stable,” said Tang Jianwei, a Shanghai-based economist at Bank of Communications, China’s fifth-largest lender. “Depreciation would create turmoil in the market and add to uncertainties in the economy.”

The yuan gained as much as 0.21 percent to 6.8670 per dollar, before closing at 6.8812 as of 5:30 p.m. in Shanghai, from 6.8817 yesterday, according to the China Foreign Exchange Trade System. The currency is allowed to trade by up to 0.5 percent against the dollar on either side of the so-called central parity rate.

Forward Contracts

Non-deliverable forwards, which fell by a record 3.3 percent on Dec. 1, surged 2.3 percent today. The contracts show the currency will weaken 4.5 percent to 7.2075 a dollar in 12 months, compared with 7.3725 yesterday.

Forwards are agreements in which assets are bought and sold at current prices for settlement at a later time. Non- deliverable contracts are settled in dollars.

China will continue to let the market play a “primary role” in establishing the value of its currency, Zhu said in a press briefing after two days of the Strategic Economic Dialogue with the U.S. in Beijing. The two governments didn’t talk about widening the yuan’s trading band in the talks, said Zhu.

U.S. Treasury Secretary Henry Paulson said today that China is still committed to the appreciation of the yuan over time. While some people in China blame yuan gains for job losses, China and the U.S. agree that a weak global economy is the cause, he said.

The fifth round of the talks ended today, the last for their initiator, Paulson, who will leave office in January.

The yuan slumped 0.7 percent on Dec. 1, the most since the end of the fixed-exchange rate, triggering concern the government was switching to a policy of depreciation.

Facing Opposition

“Any attempt to devalue the currency is likely to be met with considerable opposition from China’s trading partners,” said Simon Godfrey, who helps oversee the equivalent of $264 billion as a senior investment specialist at Fortis Investments in Hong Kong. The new U.S. administration under President-elect Barack Obama “will be less tolerant of the ‘crawling peg’ appreciation policy,” he said.

Commerce Minister Chen Deming said yesterday China won’t rely on currency depreciation to help exporters cope with faltering global demand as the global recession deepens.

“Depreciation would have a significant negative impact on other Asian currencies due to the heavy regional linkage between Asian countries and China,” said Sergey Dergachev, an emerging- market money manager at Union Investment in Frankfurt, which has $233 billion in assets. “I don’t think it will materialize.”

Union Investment, Germany’s third-largest money manager, is predicting a rate of 6.87 over the next six months, delivering a profit for buyers of forward contracts. Fortis Investments, part of the Belgian financial services company, forecasts a gain of as much as 3 percent in the coming year

Bonds Advance

Government bonds gained for the week as the central bank released more funds into the financial system, driving up demand for debt.

The central bank injected 29 billion yuan ($4.2 billion) into the money market this week during open-market operations, data compiled by Bloomberg showed. It suspended auctions of one- year bills from this week, according to a Dec. 2 notice.

More bank funds have entered the market after the central bank announced last week that the reserve ratio for major lenders would be cut by 1 percentage point, effective today.

The seven-day repurchase rate, which measures funding availability in the money market between banks, slid 12 basis points to 1.86 percent, the lowest this year, according to the National Interbank Funding Center. A basis point is 0.01 percentage point.

Good Demand

There’s “good demand for debt, especially those with shorter maturities, as their supply was even less after the central bank suspended the one-year bills,” said Fan Xiulan, a Beijing-based bond analyst at BOC International Holdings, the investment banking arm of Bank of China Ltd. “The money market rates will drop further because of the liquidity increase.”

The yield on the 4.01 percent note due May 2015 dropped 13 basis points today to 2.43 percent, compared with 2.67 percent a week ago, according to the China Interbank Bond Market. The price of the security rose 0.8 per 100 yuan face amount to 109.31.

The finance ministry sold 22 billion yuan ($3.2 billion) of one-year notes at an average yield of 1.28 percent, 17 basis points less than the 1.45 percent median estimate in a Bloomberg News survey yesterday. The yield on bills due in one year issued by the Export-Import Bank of China yesterday also fell short of the median estimate of analysts and traders by 22 basis points to 1.65 percent.

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Belinda Cao in Beijing at lcao4@bloomberg.net.

Last Updated: December 5, 2008 05:43 EST