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Yuan Forwards Snap Two-Day Decline on Reforms, Growth Optimism

Dec. 26 (Bloomberg) -- Yuan forwards strengthened, snapping a two-day decline, on optimism new policies allowing Chinese financial markets a greater role will help spur growth in the world’s second-largest economy.

The Communist Party pledged in November to give market forces a “decisive” role in the allocation of resources and said it will encourage private investment in state-run businesses. The People’s Bank of China boosted the currency’s reference rate by 0.01 percent to 6.1156 per dollar today, while the spot rate is headed for a fourth annual gain. The State Council estimates this year’s economic expansion at 7.6 percent, compared with a government target of 7.5 percent, the official Xinhua News Agency reported yesterday.

Twelve-month non-deliverable forwards climbed 0.03 percent to 6.1417 per dollar in Hong Kong, a 1.1 percent discount to the spot rate in Shanghai, data compiled by Bloomberg show. In the onshore market, the currency fell 0.05 percent to 6.0746 and has appreciated 2.6 percent this year, the best performance of Asia’s 11 most-traded exchange rates.

“The difficulties for the Chinese economy are probably behind them,” said Nizam Idris, head of strategy for fixed income and currencies at Macquarie Bank Ltd. in Singapore. “We have a more stable situation domestically right now and you’ve got reforms kicking in.”

The yuan touched 6.0702 on Dec. 23, the strongest since the government unified the market and official exchange rates at the end of 1993. The currency can diverge a maximum 1 percent from the PBOC’s daily fixing. Idris forecasts the currency will rise to 5.9 per dollar by the end of 2014.

In Hong Kong’s offshore market, the yuan traded at 6.0743 per dollar, compared with 6.0723 yesterday, data compiled by Bloomberg show. One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, slid two basis points, or 0.02 percentage point, to 1.86 percent.

To contact the reporter on this story: Kyoungwha Kim in Singapore at kkim19@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net

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