Oct. 27 (Bloomberg) -- Yuan forwards declined as China’s central bank indicated it will seek to maintain a stable exchange rate against the U.S. dollar, which today advanced against both the euro and the yen. Bonds were little changed.

The government will keep the yuan stable, the Beijing-based China Securities Journal reported today, citing central bank Deputy Governor Yi Gang. The nation’s diversification of its foreign-currency reserves shouldn’t cause short-term fluctuations in the exchange rate, the report said.

“Market speculation in the last few weeks for a resumption of the yuan’s appreciation retreated as there was no action from China’s policy makers,” said Liu Xin, a Hong Kong-based analyst at Bank of Communications Ltd., China’s fifth-biggest lender. “Now, the impact on yuan forwards will come from external factors, mainly the dollar’s rebound from excessive lows.”

Twelve-month non-deliverable yuan forwards declined 0.5 percent to 6.6760 per dollar as of 5:30 p.m. in Shanghai, reflecting traders’ bets for the currency to climb 2.3 percent from the spot rate of 6.8296. The contracts slipped as much as 0.9 percent earlier to 6.7040, the lowest since Oct. 12.

China has kept the yuan’s value around 6.83 versus the greenback since July 2008, after allowing it to rise 21 percent in the previous three years. The nation’s foreign-exchange reserves rose $141 billion in the third quarter to a record $2.273 trillion.

Dollar Index

The Dollar Index, which tracks the U.S. currency against those of six trading partners, climbed 0.8 percent yesterday. Since ending the yuan’s peg to the dollar on July 21, 2005, China’s central bank has allowed it to float with reference to a basket of currencies including the euro, yen and Korean won.

The 12-month yuan forward contracts will trade between 6.6 and 6.85 through the end of the year, Liu predicted. Forwards are agreements to buy and sell assets at current prices for delivery at a specified time and date. Non-deliverable contracts are settled in dollars.

“The earliest possible time for appreciation will be in the second quarter of next year,” he said.

Government bonds were little changed as the central bank kept the yield on one-year bills unchanged for a ninth week in open-market auctions. The People’s Bank of China today sold 13 billion yuan ($1.9 billion) of the notes at a yield of 1.7605 percent.

Bond Auction

The central bank drained 45 billion yuan in the open market via 28-day repurchase transactions at a rate of 1.18 percent, unchanged for a ninth week.

“Bond yields, especially the long-end will stabilize as the central bank won’t let its bill yields rise soon,” said Hu Hangyu, a Beijing-based fixed-income analyst at Citic Securities Co., China’s biggest brokerage by assets. “The yields retreated from the highs reached more than a week ago.”

The yield on the 3.17 percent note due August 2016 was at 3.45 percent, and the price of the security was 98.32 per 100 yuan face amount, according to the National Interbank Funding Center.

Yields on the bills may rise toward the end of the year as the central bank attempts to keep inflation in check as economic growth accelerates, according to Hu.

Today’s one-year bill sale amount was the smallest since the central bank resumed issuing the bills in July to help absorb cash from banks.

Hu expected the central bank to raise the bill yield because “if the yield is kept low all the time, the amount of issuance has to shrink further as banks won’t like to buy them,” he said. “Then it won’t help the PBOC to drain money.”

Consumer prices fell 0.8 percent in September from a year earlier, the smallest drop since declines began in February. Prices rose 0.4 percent in September from August.

--Belinda Cao. Editors: Shanthy Nambiar, James Regan

To contact Bloomberg News staff for this story: Belinda Cao in Beijing at +86-10-6535-2316 or lcao4@bloomberg.net

Last Updated: October 27, 2009 05:52 EDT