Yuan Holds Gains on Signs Central Bank to Allow Strength to Curb Inflation
June 23 (Bloomberg) -- David Kelly, chief market strategist for JPMorgan Funds, talks with Bloomberg's Rishaad Salamat about his strategy for U.S. stocks and fixed-income investments. U.S. stocks sank yesterday, with benchmark gauges declining the most in almost three weeks, as home sales unexpectedly dropped and the Standard & Poor’s 500 Index slipped for a second day below chart levels monitored by analysts. Kelly, speaking from Cleveland, Ohio, also discusses Federal Reserve policy, the outlook for the U.S. economy, and China's shift in currency policy. (Source: Bloomberg)
China’s yuan held this week’s gains against the dollar, even as Asian currencies dropped, on speculation the central bank is allowing a stronger currency to curb inflation after ending a two-year peg.
The People’s Bank of China set its reference rate for yuan trading at 6.8102 per dollar, 0.05 percent stronger than yesterday’s close of 6.8136. Asian currencies including the South Korean won declined after French lender Credit Agricole SA said yesterday it will write down the value of its stake in a Greek bank. Government bonds were little changed.
“China stands to gain the most from greater exchange rate flexibility and appreciation,” said Michael Hasenstab, who oversees the $2 billion Templeton Emerging Markets Bond Fund in San Mateo, California. “Such dynamics will help facilitate the greater internationalization of the yuan, assist in the rebalancing of the economy away from an over-reliance on exports, and help stem inflation.”
The yuan closed at 6.8124 per dollar in Shanghai, little changed from 6.8136 yesterday, according to the China Foreign Exchange Trade System. It has gained 0.23 percent this week. The 12-month non-deliverable forward traded at 6.6680, compared with 6.6463 yesterday, reflecting bets for 2.2 percent appreciation.
China is allowing the yuan to move more freely to deflect criticism from its trading partners and curb inflation, while protecting a recovery in its exports. The scrapping of the peg was announced a week before President Hu Jintao meets with Group of 20 leaders this weekend in Toronto.
Inflation Battle
The World Bank said last week that a stronger yuan would help China cool inflation, which accelerated to a 19-month high of 3.1 percent in May, exceeding the government’s full-year target of 3 percent.
“President Hu has real tangible evidence that there have been substantial changes to the currency,” said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. “If they want even more meaningful evidence, they may give more guidance with the currency’s fixing ahead of the G-20.”
Chinese authorities had prevented the currency from strengthening against the dollar since July 2008 to help exporters cope with the global financial crisis. The currency appreciated 21 percent in the three years after a managed float against a basket of currencies was introduced in 2005.
Weaker Euro
Gains this time round may be limited because the yuan has already strengthened 18 percent against the euro this year, eroding earnings for Chinese exporters in the European Union, the nation’s largest market. The yuan has climbed 0.9 percent against the euro so far this week.
Authorities will “ensure the exchange rate’s fluctuation is controllable and prevent the possibility of market forces causing excessive adjustment in the rate,” the central bank said in a June 20 statement. It noted that 16.3 percent of China’s trading volume is with the EU, compared with 12.9 percent for the U.S., making it important to manage the yuan with reference to the basket of currencies.
The currency is allowed to fluctuate 0.5 percent either side of the reference rate, which was fixed at 6.7980 yesterday.
A strengthening of the yuan against the dollar will help spur the global economic recovery, reduce imbalances and support prices of commodities and emerging-market assets, Schroders Plc said in an e-mailed report to clients. Andrew Garthwaite, global equity strategist at Credit Suisse AG, said the currency is almost 50 percent undervalued and will appreciate more in the next 12 months than forwards contracts suggest.
Bonds Stable
Government bonds were little changed after the finance ministry sold 10-year debt at a higher yield than was predicted by analysts and traders.
The ministry sold 28 billion yuan ($4.1 billion) of 10-year bonds at an average rate of 3.41 percent, two basis points more than the median estimate in a Bloomberg News survey. A basis point is 0.01 percentage point.
“Cash shortage at banks will continue to curb debt demand till mid-July,” said Huang Wentao, a bond analyst at China Securities Co. in Beijing. “The change in yuan rate policy hasn’t immediately added more cash into financial markets.”
The yield on the 2.33 percent note due in June 2013 was little changed at 2.5 percent, and the price was 99.52 per 100 yuan face amount, the funding center data showed.
The seven-day repurchase rate, a measure of lending cost between banks, declined 12 basis points to 2.72 percent, according to a daily fixing rate by the National Interbank Funding Center. It yesterday increased 20 basis points.
To contact the reporter on this story: Patricia Lui in Singapore at plui4@bloomberg.net Judy Chen in Shanghai at xchen45@bloomberg.net Belinda Cao in Beijing at lcao4@bloomberg.net
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