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Morgan Stanley Says PBOC Has Changed Yuan Language

Morgan Stanley said that China’s central bank changed language relating to yuan policy in its latest monetary policy report, signaling its intention to let the yuan appreciate.

Policy makers plan to further improve the managed float exchange-rate regime and keep the currency broadly stable “based on market demand and supply, and with reference to a currency basket,” the People’s Bank of China said in the outlook section of a quarterly statement today. The previous report called for improving policies in a “controllable” and “gradual” manner.

“The change is big, it’s huge,” said Wang Qing, chief economist for Greater China in Hong Kong at Morgan Stanley. “They haven’t used this language of saying the currency should be determined on a currency basket, and determined by market demand and supply and a managed-float exchange regime. This language has been missing for many reports.”

China halted the currency’s 21 percent, three-year advance against the dollar in July 2008 to help exporters weather recessions in the U.S., Europe and Japan. Officially its exchange-rate regime still involves managing the exchange rate against a basket of currencies including the euro and the Japanese yen.

Export Gain

Before the statement, yuan forwards strengthened the most this year after China reported a pickup in exports, fanning optimism policy makers will let the currency appreciate. Exports rose 30.5 percent in April from a year earlier, the customs bureau said today, exceeding the previous month’s 24.3 percent gain and the 28.9 percent forecast in a Bloomberg survey of economists.

Twelve-month non-deliverable forwards gained 0.5 percent to 6.6778 per dollar as of 5:50 p.m. in Hong Kong, reflecting bets the currency will strengthen 2.2 percent from the spot rate of 6.8265, according to data compiled by Bloomberg. That’s the biggest increase since Dec. 22.

The yuan’s 12-month forwards also climbed after European Union finance ministers announced an aid package worth as much as 750 billion euros ($962 billion). Interest-rate swaps increased before inflation data is released tomorrow.

China had a trade surplus of $1.68 billion last month, the customs bureau said, compared with a deficit of $7.24 billion in March. Economists forecast a shortfall of $550 million, according to the median estimate in a Bloomberg survey.

Banks have interpreted shifts in language before only to be proved wrong. The central bank scrapped the pledge to keep the yuan “basically stable” in its quarterly monetary policy report on Nov. 11. Subsequent reports included the language again.

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