Yuan Advances Most This Year on Greek Progress, Exporter Demand

The yuan gained the most this year on optimism progress is being made on solving the European debt crisis and speculation exporter demand for the currency rose after the Lunar New Year holidays last week.

The yuan was poised for its worst monthly loss in 18 years earlier before rallying after Greek Prime Minister Lucas Papademos said progress had been made in talks with creditors. China is scheduled to release a manufacturing purchasing managers’ index for January tomorrow. Economists surveyed by Bloomberg estimate the gauge will be at 49.6, compared with 50.3 in December. Fifty is the dividing line between contraction and expansion.

“The latest news from Greece provides a breather,” said Patrick Cheng, a Hong Kong-based foreign-exchange analyst at Haitong International Securities Co. “Exporters’ demand for the yuan becomes stronger after the Lunar New Year Holidays.”

The yuan advanced 0.36 percent to close at 6.3085 per dollar today in Shanghai, paring this month’s decline to 0.23 percent, according to the China Foreign Exchange Trade System. It was the biggest daily gain since Dec. 30. The currency’s monthly loss widened to as much as 0.6 percent earlier, the worst performance since the start of 1994 when China unified the official and market exchange rates.

The People’s Bank of China has lowered the reference rate by 0.17 percent this year. The central bank weakened the fixing by 0.09 percent to 6.3115 today. The yuan is allowed to trade as much as 0.5 percent on either side of the rate.

Slowing Growth

Asia’s largest economy will expand 8 percent in the first quarter this year, the slowest growth since 2009, according to the median estimate in a Bloomberg survey. Exports rose 13.4 percent in December from a year earlier, the least in two years, data from the Beijing-based customs bureau showed this month.

Foreign-exchange reserves fell last quarter for first time in more than a decade as Europe’s debt crisis spurred an emerging-market asset sell-off.

“Investors are worried about China’s export outlook as the European debt crisis lingers,” said Banny Lam, a Hong Kong-based economist at CCB International Securities Ltd., a unit of China’s second-largest bank. “Possible capital outflows also add to the concern that economic growth will slow further.”

China kept the yuan at about 6.83 per dollar from July 2008 to June 2010 to help exporters weather a global recession. The currency will strengthen the least since 2009 this year as Europe’s debt crisis hurts exports, according to the most-accurate forecasters.

Offshore Gains

Yuan assets in offshore markets increased in January as the Federal Reserve signaled U.S. interest rates will stay near zero through 2014. Last month, China granted 21 local financial companies yuan qualified foreign institutional investor licenses, allowing them to invest about 20 billion yuan raised offshore in China’s domestic markets. The companies started selling these so-called yuan QFII funds this month.

In Hong Kong’s offshore market, the yuan advanced 0.17 percent to 6.3025, extending this month’s gain to 0.7 percent, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards rose 1.6 percent to 6.2835 in January, the most since August. The contracts, which were little changed today, are at a 0.4 percent premium to the onshore spot rate.

China plans to “substantially” increase quotas for the yuan QFII program, China Business News reported today, citing an unidentified person close to regulators. The government may more than double the combined quota for the dollar-denominated QFII quota from $30 billion, the Chinese-language paper reported on Jan. 18.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE