Yuan Climbs to Five-Week High on Slowest Inflation in 30 Months

Aug. 9 (Bloomberg) -- China’s yuan climbed to a five-week high as government data showing the slowest inflation since January 2010 fueled speculation policy makers will step up stimulus to counter an economic slowdown.

Consumer prices climbed 1.8 percent from a year earlier in July, the nation’s statistics bureau said today. That followed a 2.2 percent increase in June. Decelerating increases in living costs may allow for further loosening of monetary policy, the China Securities Journal reported today, citing Li Kai, deputy director at the State Information Center.

“Growth is the government’s priority and easing inflation definitely allows policy makers to be more aggressive,” said Banny Lam, chief economist at CCB International Securities in Hong Kong. The currency should stop weakening for now as “investors are still looking for more signals to confirm the effectiveness of China’s stimulus measures,” he said.

The yuan gained 0.04 percent to close at 6.3590 per dollar in Shanghai, according to the China Foreign Exchange Trade System. It touched 6.3502 today, the strongest level since July 5. One-month implied volatility, a measure of exchange-rate swings used to price options, increased 23 basis points, or 0.23 percentage point, to 1.4 percent.

The People’s Bank of China set the yuan’s reference rate 0.01 percent weaker at 6.3387 per dollar today. The currency is allowed to trade as much as 1 percent on either side of the central bank’s daily fixing.

Exports Growth

Producer prices fell 2.9 percent from a year earlier in July following a 2.1 percent decline the previous month, official data showed today. Overseas sales probably increased 8 percent last month from a year earlier, compared with an 11.3 percent increase in June, according to the median estimate in a Bloomberg survey before trade figures are released tomorrow.

China will probably cut banks’ reserve-requirement ratios this month and reduce benchmark interest rates in September as “the concerns over inflation are gone,” Lam said.

In Hong Kong’s offshore market, the yuan advanced 0.12 percent to 6.3630 per dollar, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards rose 0.08 percent to 6.4230, a 1 percent discount to the spot rate in Shanghai, data compiled by Bloomberg showed.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net