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Yuan Forwards Near Eight-Month Low on Concern China to Delay Appreciation

Yuan forwards traded near their weakest level since September on speculation China will defer a strengthening of its currency as Europe’s debt crisis puts the global economic recovery at risk.

The yuan’s 12-month forwards surrendered earlier gains after Zhang Xiaoqiang, Vice Chairman of the National Development and Reform Commission, said China and the U.S. didn’t discuss the yuan in the first round of talks that began today in Beijing. Chinese exports may be affected as European governments damp spending and boost taxes to rein in budget deficits, said Zhang at the nation’s top planning agency.

Twelve-month non-deliverable forwards traded at 6.7425 per dollar as of 5:37 p.m. in Hong Kong, from 6.7435 at the end of last week, reflecting bets the currency will strengthen 1.2 percent from the spot rate of 6.8285, according to data compiled by Bloomberg. The contracts touched 6.7750 on May 21. Against the euro, the yuan appreciated 0.8 percent, contributing to a 16 percent advance for the year.

“With all the volatility going on in financial markets and with the sharp rally in the yuan against most currencies, it’s unlikely for them to move anytime soon,” said Thomas Harr, a strategist at Standard Chartered Plc in Singapore. “The window of opportunity is not there at the moment.”

Central bank Governor Zhou Xiaochuan said at a briefing in Beijing today the influence of international factors on exchange-rate policies is usually smaller than that from domestic factors. He said China’s currency policy is being “touched upon” at the two days of talks.

Steady Advance

Chinese President Hu Jintao reiterated a pledge to “steadily advance” toward reform of the yuan at the opening of the two-day dialogue in Beijing today. U.S. Treasury Secretary Timothy F. Geithner said China’s leaders have recognized exchange-rate reform is “an important part of their broader reform agenda.”

Allowing the exchange rate to reflect market forces is important for China’s economy, Geithner said. Geithner, Secretary of State Hillary Clinton and Federal Reserve Chairman Ben S. Bernanke are in Beijing for the annual talks.

Pictet Asset Management bought yuan forwards last week, predicting policy makers will allow modest appreciation.

The investment unit of Switzerland’s largest closely held private bank “put on some positions just in case,” Wee-Ming Ting, the Singapore-based head of Asian fixed income at Pictet, who helps oversees $11.5 billion of emerging-market debt globally, said in a telephone interview.

Less Costly

“Right now it’s a less costly time to put in a long yuan position,” Ting said, referring to bets that the currency will strengthen. “We still view that there will be a gradual appreciation of the yuan provided global risk aversion, triggered by Europe’s debt crisis, doesn’t continue to spread.”

China’s stocks rallied today on speculation the government will abstain from further measures to cool the economy given Europe’s debt crisis. The Shanghai Composite Index rose 3.5 percent, paring its loss for this year to 18 percent.

Stephen Green, head of China research at Standard Chartered in Shanghai, said in a report today China will end the yuan’s 22-month peg against the dollar in the third quarter, compared with his previous forecast for a move in May.

Money Rate Climb

China’s benchmark money-market rate rose to the highest level in three months as monetary tightening leaves lenders with less capital to lend.

The seven-day repurchase rate, which measures funding availability between banks, rose five basis points to 1.86 percent, the highest level since Feb. 20, according to the daily fixing rate published by the National Interbank Funding Center. The rate climbed as high as 2.2 percent in trading. A basis point is 0.01 percentage point.

“Cash supply in the money market is becoming tighter and big banks have less capital for lending,” said Hu Hangyu, a Beijing-based fixed-income analyst with Citic Securities Co., China’s biggest brokerage by assets. “I heard rumors that the central bank is seeking to raise money-market rates” to keep liquidity under control.

The People’s Bank of China may offer higher yields on its one-year bills for the first time in four months at open-market auctions this week to help drain more cash at banks, said Chen Jianheng, a Beijing-based fixed-income analyst at China International Capital Corp. The three-month bill rate climbed four basis points last week, the first increase since Jan. 20.

“The one-year bill yield may have to rise since the interbank lending rate has reached so high,” said Shi Lei, an analyst at Bank of China Ltd. in Beijing.

Government bonds due in one year and longer were little changed. The yield on the 2.23 percent note due in March 2013 were 2.28 percent, and the price of the security was 99.88 per 100 yuan face amount, according to the National Funding Center data.

--Judy Chen, Belinda Cao. With assistance from Lilian Karunungan in Singapore. Editors: Sandy Hendry, James Regan

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at +86-21-6104-7047 or xchen45@bloomberg.net. Belinda Cao in Beijing at +86-10-6649-7570 or lcao4@bloomberg.net

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