Yuan Concludes Weekly Gain on Speculation China to Allow Gains

China’s yuan advanced, completing its biggest weekly gain this month, on speculation the central bank will tolerate further appreciation to cool inflation.

People’s Bank of China Governor Zhou Xiaochuan “admitted that further monetary tightening needs to occur,” Morgan Stanley Asia non-executive chairman Stephen Roach said yesterday, citing comments made at a meeting between the two this week. The central bank set the reference rate 0.07 percent higher at 6.5580 per dollar, the strongest level since July 2005.

“The firmer fixing reflects a drive by China to strengthen its currency to fight imported inflation,” said Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong. “At the same time, China may not want faster currency appreciation to be too obvious because that will invite speculation.”

The yuan gained 0.06 percent today and 0.18 percent this week to 6.5576 per dollar at the end of trading in Shanghai, according to the China Foreign Exchange Trade System. The currency touched 6.5552 per dollar on March 22, the strongest level since the country unified official and market exchange rates at the end of 1993.

Twelve-month non-deliverable forwards rose 0.07 percent to 6.439 per dollar as of 4:45 p.m. in Hong Kong, reflecting bets the yuan will strengthen 1.8 percent in a year, according to data compiled by Bloomberg.

Consumer Prices

The central bank has raised benchmark lending and deposit rates three times since the middle of October. The monetary authority ordered banks to set aside more cash as reserves on March 18, the third time it has done so this year.

Consumer prices rose 4.9 percent in February from a year earlier, exceeding the government’s annual target of 4 percent, the statistics bureau said on March 11. Prices gained 4.9 percent in January.

The nation will rely on price tools to implement monetary policy, and interest rates will be at the “core” of that strategy, Zhang Xiaohui, director of the monetary policy department of the People’s Bank of China wrote in a commentary posted on its website yesterday.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net