Yuan Gains Most Since May as Zhou Pledges to Keep Markets Stable

China’s yuan strengthened the most in a month after central bank governor Zhou Xiaochuan said the nation will maintain market stability, his first comment since a record cash crunch that spurred concern growth will ease.

The country’s growth slowdown remains in a “reasonable” range and the economy is stable, Zhou said today at a forum in Shanghai. China will expand cross-border use of the yuan and push forward convertibility in the capital account, he said. Borrowing costs for Chinese banks surged the most in at least six years in June as rating companies said the funding shortage threatens to swell bad loans.

“The panic is over as investors now have better clarity of the PBOC’s intention,” said Banny Lam, the Hong Kong-based co-head of research at Agricultural Bank of China International Securities Ltd., a unit of the nation’s third-largest lender. “The prospect of allowing more global usage of the yuan will support the exchange rate in the longer term.”

The yuan rose 0.19 percent to close at 6.1376 per dollar in Shanghai, the biggest one-day gain since May 27, according to China Foreign Exchange Trade System prices. The currency lost 0.06 percent this week and advanced 1.2 percent this quarter. The People’s Bank of China raised the reference rate 0.02 percent to 6.1787 per dollar today. The spot rate is allowed to diverge from the fixing by a maximum 1 percent.

Growth Woes

The official Purchasing Managers’ Index was probably at 50.1 in June, down from 50.8 the previous month, signaling slower manufacturing growth, according to a Bloomberg survey of analysts before data due July 1. HSBC Holdings Plc said this week the yuan will fall to 6.16 per dollar by the end of 2013 as the economy slows.

“The cash squeeze can make borrowing more difficult and that will translate into slower growth,” said Tommy Ong, executive director of treasury and markets at DBS Bank (Hong Kong) Ltd.

Twelve-month non-deliverable forwards rose 0.2 percent to 6.2923 per dollar today, according to data compiled by Bloomberg. The contracts are at a 2.5 percent discount to the onshore spot rate. The offshore yuan traded in Hong Kong advanced 0.18 percent to 6.1357. One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, fell four basis points to 1.79 percent.

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