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Yuan Advances as Obama Adviser Summers Visits China

US National Economic Council Chairman Larry Summers
US National Economic Council Chairman Larry Summers and Deputy National Security Adviser Thomas Donilon (not pictured) meet with Chinese Communist Party's Central Organization Department Minister Li Yuanchao (not pictured) at the Great Hall of the People in Beijing on September 6, 2010. Photographer: Feng Li/AFP/Getty Images

China’s yuan strengthened the most in nearly three weeks as the dollar slumped and a U.S. government adviser visited Beijing for talks, fanning speculation the central bank will allow more gains.

The currency reached the strongest level since Aug. 19 as Larry Summers, head of President Barack Obama’s National Economic Council, met in Beijing today with officials including Li Yuanchao, head of the Communist Party’s organization department. Asian currencies rallied after a government report showed U.S. private payrolls climbed 67,000 in August, beating the 40,000 gain forecast in a Bloomberg survey of economists.

“Summers will definitely press China for more appreciation in the yuan because the amount China has allowed is far less than what the U.S. Congress desires,” said Ken Peng, a Beijing- based economist at Citigroup Inc. “The U.S. dollar’s slump is also an important driving force.”

The currency gained 0.24 percent to 6.7874 per dollar in Shanghai, the biggest gain since Aug. 17, according to the China Foreign Exchange Trade System. It touched a high of 6.7855 today and Peng said the yuan may reach 6.7 by the end of this year.

The pace of appreciation will be mainly determined by the U.S. dollar because of the greenback’s “absolute dominance” in the basket of currencies the yuan is managed against, Ji Min, an official at the central bank’s research department, wrote in the Chinamoney magazine, which was published on Aug. 20.

Elephant in Room

President Obama “has emphasized for us the importance he attaches to a very strong relationship between the United States and China,” Summers told Vice Premier Wang Qishan in front of reporters today before the two held talks. “I think we all benefit from candid conversation that enables us both to understand each other’s thinking.”

The Obama administration on Aug. 31 rejected a plea from U.S. manufacturers to increase duties on imports from China to compensate for the effects of a weak yuan.

“The Commerce Department made its finding while still managing to ignore the elephant in the room, which is China’s currency manipulation,” Senator Charles Schumer, a New York Democrat, said on the same day in a statement. “Once again, even when the opportunity is thrust into its hands, the administration has refused to take action.”

U.S. lawmakers will hold a hearing on Sept. 15 to consider what government action is needed to address China’s exchange- rate policy.

Trade Deficit

The People’s Bank of China has allowed the yuan to rise 0.6 percent against the dollar since a two-year dollar peg was scrapped on June 19 in favor of managing the exchange rate against a basket of currencies.

China ran up a $119 billion trade deficit with the U.S. in the first half of 2010, putting it on course to exceed last year’s total of $227 billion, according to U.S. official figures. Treasury Secretary Timothy F. Geithner said last month he will “watch closely” how much the yuan is allowed to appreciate, after saying in July the currency was undervalued.

China’s government bonds were little changed following auctions of three-year and five-year debt.

The finance ministry sold 15.2 billion yuan ($2.2 billion) of notes due 2015 for local governments at a yield of 2.67 percent, according to a statement on the website of Chinabond, the nation’s largest clearing house. It also sold 20.6 billion yuan of securities due 2013 at a yield of 2.36 percent.

“The yields are within the market’s expectation,” said Guo Caomin, a bond analyst at Industrial Bank Co. in Shanghai. “The market is so calm because there isn’t any news.”

The yield on the 3.28 percent note due August 2020 was little changed at 3.24 percent, its highest level since Aug. 19, and the price of the security was at 100.3348, according to the China Interbank Bond Market. A basis point is 0.01 percentage point.

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