Yuan Climbs to Strongest Level Since 1993 on China Stimulus Bets

The yuan climbed to its strongest level since 1993 on speculation China will step up efforts to arrest a seven-quarter slowdown in the world’s second-largest economy.

The People’s Bank of China strengthened the reference rate by 0.08 percent today, the most since Aug. 22, fixing it at 6.3410 per dollar. The monetary authority injected a record amount of funds into the financial system this week to ease a cash squeeze in the run up to a weeklong holiday that starts Oct. 1. The Shanghai Composite Index jumped 4.1 percent in the past two days, buoyed by a report suggesting policy makers plan to unveil stock-market supporting measures.

“Funds are flowing back into the market as people bet China will soon act more aggressively to revive growth,” said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd. (23) “There’s always expectations that the government will announce important polices before or at the end of a long holiday. The stock market is also rallying on stimulus bets.”

The yuan gained 0.24 percent to 6.2872 per dollar at 2:51 p.m. in Shanghai, according to the China Foreign Exchange Trade System. It touched 6.2856, the strongest level since China unified official and market exchange rates at the end of 1993. The currency, which has strengthened 1.1 percent this quarter, can trade as much as 1 percent on either side of the central bank’s daily fixing.

‘New Stimulus’

The securities regulator is considering lowering taxes on securities investments, China Securities Journal reported today, citing an unidentified official. Economists predict gross domestic product will increase 7.4 percent this quarter, according to the median estimate in a Bloomberg survey, and that would be the smallest gain since March 2009.

“The economy is not doing so well and the government will implement new stimulus although the scale won’t be as large as before due to concerns about some bubbles in the property market,” said Bruce Yam, a foreign-exchange strategist at Sun Hung Kai Financial Ltd. “The yuan will find it difficult to strengthen beyond 6.25 in the final quarter.”

Still, a People’s Bank of China academic adviser said the risk of a rebound in property prices may help explain why the government is holding back from easing monetary policy to counter a deepening economic slowdown.

That concern is “a big restraint,” Chen Yulu, president of Beijing’s Renmin University, said yesterday to reporters after speaking at a forum in the city. Further cuts in reserve requirements or interest rates depend on how much external demand worsens, Chen said.

Twelve-month non-deliverable forwards gained 0.14 percent to 6.4097 per dollar in Hong Kong, according to data compiled by Bloomberg. That was a 1.9 percent discount to the spot rate in Shanghai.

One-month implied volatility, a measure of exchange-rate swings used to price options, fell five basis points, or 0.05 percentage point, to 1.15 percent. In Hong Kong’s offshore market, the yuan rose 0.17 percent to 6.3026.

To contact the reporters on this story: Kyoungwha Kim in Singapore at kkim19@bloomberg.net Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.

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