Yuan Rises Most Since June as China Seen Focusing on Stability

  • PBOC choosing steady currency over monetary easing: strategist
  • Sovereign bond yield drops to seven-year low as inflows climb

Inside the Yuan's Roller-Coaster Year

The yuan strengthened the most in more than two months on bets China’s policy makers are focusing on exchange-rate stability as the economy shows increasing signs of a recovery.

There’s no need for a rush to cut interest rates or lower bank reserve requirements, China National Radio cited a researcher at a State Council office as saying. The comments came after the People’s Bank of China said Friday that monetary easing would lead to yuan depreciation expectations and fuel speculative trades. The stress on currency stability is being made easier by data suggesting the economy is recovering.

The yuan climbed 0.43 percent to 6.6318 per dollar as of 6:58 p.m. in Shanghai, according to prices from the China Foreign Exchange Trade System. The offshore rate in Hong Kong rose 0.37 percent to advance for a second day, while a Bloomberg replica of China’s trade-weighted CFETS RMB Index weakened. A gauge of the dollar’s strength extended declines amid speculation the Federal Reserve will be slow to raise borrowing costs.

"The PBOC prefers to keep the exchange rate stable rather than using reserve-ratio cuts to stimulate growth because China doesn’t want to see extreme volatility in the yuan market," said Gao Qi, a foreign-exchange strategist at Scotiabank in Singapore. “The yuan may face a bout of downward pressure in December as the dollar could rise after the U.S. election is out of the way in November.”

The signs of calm are a far cry from a year ago, when China shocked global markets by devaluing its currency. This time, volatility is near the lowest levels since November and economic data show a gradual recovery. The nation’s foreign-exchange reserves have leveled out around $3.2 trillion, and data Tuesday showed a streak of factory-gate deflation may be coming to an end after more than four years.

China will push the yuan’s global use by seeking more cooperation with other countries and improving the infrastructure needed to support wider use of the currency, the PBOC said in a statement Wednesday before releasing its annual yuan internationalization report. Cross-border use of the currency under the current account will be increased, and channels for yuan financing will be widened, according to the monetary authority.

There is speculation that the PBOC will steady the yuan as the nation prepares to host a Group of 20 summit in the eastern city of Hangzhou in September and ahead of the currency’s entry into the International Monetary Fund’s reserves in October.

Bond Yields

In the sovereign bond market, the benchmark 10-year yield fell two basis points to 2.70 percent, the lowest level since January 2009. The Ministry of Finance sold five-year debt at 2.43 percent on Wednesday, compared with a yield of 2.53 percent in the secondary market the previous day.

Chinese government bonds have benefited from overseas inflows after the nation eased access to domestic markets. Demand for the relative safety of government debt has been driven also by a rising number of company defaults, with a Chinese shipbuilder becoming the latest to renege this week.

— With assistance by Tian Chen

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