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Yuan Strengthens Most in Two Months on Signs PBOC Favors Gains

China’s yuan strengthened the most in two months on speculation the central bank will permit appreciation to help prevent capital outflows from the world’s second-largest economy.

The People’s Bank of China set its daily reference rate 0.1 percent stronger at 6.3352 per dollar, after fixing it weaker for three days. Two days ago, the central bank pledged to keep stability in the yuan’s exchange rate, according to a statement on its website summarizing the results an annual economic planning meeting of Communist Party leaders in Beijing.

“Today’s sharp appreciation shows the central bank sent a strong signal that the yuan’s appreciation trend won’t change,” said Liu Dongliang, a senior analyst in Shenzhen at China Merchants Bank Co., the nation’s sixth-biggest lender. “The PBOC knows that currency depreciation would weaken investors, traders and even average people’s confidence in the economy.”

The currency gained 0.4 percent to 6.3484 per dollar as of the close in Shanghai, according to the China Foreign Exchange Trade System. It earlier rose as much as 0.7 percent to 6.3294, the strongest level since China unified official and market exchange rates at the end of 1993.

Chinese Commerce Minister Chen Deming told journalists in Geneva yesterday that he is “not too optimistic” about exports next year. The country should use multiple monetary tools to adjust money and loan supply, according to a front-page commentary by an unidentified writer at the Financial News, published by the central bank.

The currency is allowed to trade as much as 0.5 percent on either side of the central bank’s reference rate. The yuan touched the weaker end of the trading range in the last 12 days.

“The fixing was firmer and at market open there was solid dollar offer interest, in particular by Chinese banks,” said Dariusz Kowalczyk, Hong Kong-based senior strategist at Credit Agricole CIB. “Improved sentiment in global markets is helping as is news that China is easing curbs in the property sector which will limit downside risks to growth.”

Reserve Ratios

The People’s Bank of China this month cut the amount of cash that banks must set aside as reserves for the first time since 2008 as Europe’s debt crisis dimmed the outlook for exports and growth. The 50 basis-point decrease in reserve-requirement ratios took effect last week, before central bank data showing money supply expanded in November at the slowest pace in a decade.

The Shanghai Composite index has tumbled 21 percent in 2011, exceeding last year’s 14 percent decline, as shipments to Europe, China’s biggest export market, slowed because of the region’s debt crisis and the government raised interest rates to curb inflation.

Nomura Holdings Inc. on Dec. 6 cut its estimate for China’s economic growth next year to 7.9 percent from 8.6 percent. Annual expansion averaged 10.5 percent in the last decade, government figures show.

Annual economic growth will average 7 percent to 8 percent through 2015, Yu Bin, director of macroeconomic research at the State Council’s Development Research Center, said yesterday.

Twelve-month non-deliverable forwards strengthened 0.5 percent to 6.4195 per dollar, a 1.1 percent discount to the onshore spot rate. In Hong Kong’s offshore market, the yuan advanced 0.38 percent to 6.3740.

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