Yuan Forwards Fall as Chinese Officials Say Won't Yield to Global Pressure

Yuan forwards weakened for a second day after Chinese officials said the nation won’t yield to global calls to end a 22-month peg, damping speculation next week’s U.S.-China trade talks would trigger appreciation.

China won’t succumb to external pressure and will modify the currency based on the economic situation, Assistant Finance Minister Zhu Guangyao said in Beijing today. Stability between the world’s major reserve currencies will aid the global economic recovery, he said at a briefing to discuss the May 24- 25 Strategic & Economic Dialogue in Beijing.

“There are a lot of mixed messages coming out before the SED talks and the G-20 meetings causing speculation for a move, but I still don’t think it’s imminent,” said Mitul Kotecha, head of global currency strategy at Credit Agricole CIB in Hong Kong. “Appreciation in two to three months is on track, but the euro’s decline and the European debt crisis have delayed it.”

The yuan’s 12-month non-deliverable forward contracts fell 0.2 percent to 6.7260 per dollar as of 5:03 p.m. in Hong Kong, 1.5 percent stronger than the spot rate of 6.8277. The projected gain was the least indicated since September. Against the euro, China’s currency has strengthened 16 percent this year as Greece needed a bailout to repay its debt.

“Only the authorities of a sovereign country have the right to decide how to form the exchange rate,” Zhu said. Countries should “work to maintain the stability of exchange rates between currencies so as to create a favorable environment for the global economic recovery,” he said.

China has held the yuan at about 6.83 per dollar since July 2008, after allowing it to appreciate by 21 percent over three years. Treasury Secretary Timothy Geithner, among officials participating in the talks, this week called for China to ensure a “level playing field” for U.S. companies.

‘Mixed Messages’

China’s commerce minister, Chen Deming, told reporters in Austria yesterday his country would maintain the stability of its currency to foster economic growth, Xinhua News Agency reported today. The yuan’s peg to the dollar isn’t likely to be a “major issue” at next week’s discussions, the China Daily reported, citing central bank adviser Li Daokui.

Li said the SED is expected to “play down” the currency issue, giving China “leeway” to make its own decision, according to the newspaper. Pressure for appreciation may decline as the nation’s trade surplus shrinks, the China Securities Journal said today in an editorial.

G-20 Meeting

Finance ministers from the Group of 20 nations will meet June 4-5 in Busan, South Korea. The central bank governors of Brazil and India last month joined the U.S. in calling for China to allow the yuan to appreciate.

China is the largest foreign investor in U.S. Treasuries and also the country’s second-largest trading partner. Total U.S.-China trade in goods was $94 billion for the first three months of 2010, up 19 percent from the same period in 2009. The U.S. trade deficit with China was $52 billion in the first three months of the year, up 3 percent from the first quarter of 2009.

The Chinese government may change the yuan exchange rate within two to three months, the National Business Daily reported today, citing Wu Qing at the State Council’s Development Research Center. Adjusting the currency’s exchange rate is preferable to raising interest rates, Wu told the newspaper.

Bonds Decline

Government bonds declined after the central bank pushed up the yield on three-month bills for the first time in four months, spurring speculation it may step up draining of liquidity.

The People’s Bank of China sold the three-month paper at 1.45 percent, from 1.41 percent last week, the first increase since Jan. 21. It issued three-year notes at a yield of 2.70 percent, lower than 2.72 percent on May 6 and higher than yesterday’s secondary-market trading rate of 2.59 percent for similar-maturity existing securities.

“The central bank is trying to curb inflation by pushing up the three-month bill yield because any change in the open-market interest rates will send an important policy signal to the market,” said Jiang Chao, an analyst in Shanghai at Guotai Junan Securities Co., the nation’s largest brokerage by revenue. “At the same time, it lowers the three-year bill yield to damp the market’s speculation about an imminent interest-rate hike.”

The yield on the 3.36 percent note due March 2020 climbed four basis points to 3.19 percent, and the price of the security dropped 0.30 per 100 yuan face amount to 101.47, according to the China Interbank Bond Market.

The monetary authority withdrew a net 51 billion ($7.5 billion) yuan of capital from the financial market this week, compared with an injection of 152 billion yuan last week, according to data compiled by Bloomberg.

Jiang said the central bank will probably allow the yield on one-year bills to rise from 1.9264 percent at an auction next week, and it may raise the benchmark deposit rate by 27 basis points as early as October.

--Bob Chen and Judy Chen. With assistance from Michael Forsythe in Beijing. Editors: James Regan, Sandy Hendry

To contact the reporter on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net; Judy Chen in Shanghai at Xchen45@bloomberg.net.

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