Yuan Advances on Speculation Policy Makers Will Tolerate Gains

China’s yuan gained, snapping a three-day drop, on speculation policy makers will allow currency gains to tame inflation in the world’s second-biggest economy.

The nation should maintain a proactive fiscal policy along with prudent monetary policy because it helps curb inflation, Jia Kang, head of the research institute for fiscal science under the ministry of finance, wrote in a commentary in the People’s Daily today. The Bloomberg-JPMorgan Asia Dollar Index gained on optimism European leaders will consider restarting purchases of covered bonds to ease monetary conditions.

“Investors are buying into the market as European political leaders seem to be acting to stabilize the situation,” said Banny Lam, a Hong Kong-based economist at CCB International Securities Ltd. “Even if global economic growth falls sharply, China will continue to let the yuan gain to lower the cost of imports.”

The yuan strengthened 0.12 percent to 6.3927 per dollar as of 9:58 a.m. in Shanghai, according to the China Foreign Exchange Trade System. The People Bank’s of China set its daily reference rate 0.04 percent weaker at 6.3760.

In Hong Kong’s offshore market, the yuan rose 0.31 percent to 6.4600 per dollar, extending the week’s gain to 0.8 percent, Bloomberg data show. Twelve-month non-deliverable forwards advanced 0.28 percent to 6.3819, a 0.2 percent premium to the onshore rate, according to data compiled by Bloomberg.

China must “quickly” implement a more flexible exchange- rate policy, Financial Times Deutschland reported yesterday, citing International Monetary Fund Deputy Managing Director Zhu Min as saying in an interview.

Consumer prices in China rose 6.2 percent in August from a year earlier after having climbed 6.5 percent the previous month. The increase in July was the most in three years.

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

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