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Yuan Forwards Drop After China Says Trade Surplus Will Shrink

Yuan forwards declined on speculation appreciation pressure will ease after China’s commerce ministry said the country’s trade surplus will narrow. Government bonds slumped.

China’s 2010 trade surplus will “definitely” be smaller than in 2009, Vice Commerce Minister Zhong Shan told reporters in Beijing today. The central bank has kept the reference rate for yuan trading little changed over the past two days after U.S. Treasury Secretary Timothy F. Geithner met Chinese Vice Premier Wang Qishan in Qingdao on Oct. 24 to discuss ties between the two nations.

“The shrinking trade surplus will ease pressure on the yuan,” said Zhao Qingming, a senior analyst at China Construction Bank Corp. in Beijing, the country’s second-largest lender. “There won’t be any big change in the exchange rate following Geithner’s meeting with Wang.”

Twelve-month non-deliverable forwards weakened 0.5 percent to 6.4765 per dollar as of 5:37 p.m. in Hong Kong, reflecting bets the currency will strengthen 2.9 percent from the spot rate of 6.6627, according to data compiled by Bloomberg.

Exports exceeded imports by $17 billion in September, the smallest monthly surplus in five months and bringing this year’s total trade balance to $121 billion, according to customs bureau data on Oct. 13.

The central bank set the reference rate at 6.6762 per dollar today, compared with 6.6729 yesterday.

Bonds Slump

Government bonds slumped after the central bank raised the yield on one-year bills for the first time since June 8, spurring speculation it will use more tightening measures to contain inflation.

The central bank sold 40 billion yuan ($6 billion) of the securities at a yield of 2.2913 percent, compared with 2.0929 percent a week ago, according to a statement on its website today. The finance ministry will sell 28 billion yuan of 10-year bonds tomorrow.

“The bond yield jumped because of the rising inflation expectation,” said Dong Dezhi, a bond analyst in Shanghai at Bank of China Ltd., the nation’s fourth-largest lender. “Also, traders are worried the yield will be higher than expected at tomorrow’s 10-year debt auction, so they are trying to cut their positions now.”

The yield on the 3.28 percent note due August 2020 surged six basis points to 3.66 percent, according to the China Interbank Bond Market. A basis point is 0.01 percentage point.

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