Yuan Reaches Highest Since Peg Ended After China Raises Rates
By Belinda Cao
http://www.bloomberg.com/apps/news?pid=pho...id=aKZue03peE9o Dec. 21 (Bloomberg) -- The yuan rose for a second week, touching the highest since the dollar peg was ended in July 2005, on speculation the central bank will seek a stronger currency to curb inflation after raising interest rates to a nine-year high.
The currency climbed as high as 7.3550 per dollar today after the People's Bank of China yesterday increased the one- year lending and deposit rates. The currency is set for a 6 percent gain this year, almost double last year's. The central bank today said it will boost the flexibility of the yuan and let the market play a bigger role in setting the exchange rate.
``The central bank may use more tools, including further yuan appreciation to reduce the trade surplus, which has fueled the inflation,'' said Tang Liang, a currency trader at the Beijing Branch of Industrial & Commercial Bank of China.
The yuan traded at 7.3696 per dollar at the 5:30 p.m. close in Shanghai, from 7.3715 at the end of last week, according to the China Foreign Exchange Trade System. The yuan rose 3.4 percent in 2006. The yuan, which is managed against a basket of currencies including the yen, Korean won and British pound, has gained more than 12 percent against the dollar since July 2005.
Forward contracts in the yuan show traders are betting on an 8.6 percent gain to 6.7863 in the next 12 months. The median estimate of 28 analysts surveyed by Bloomberg News is for a 6.9 rate by the end of 2008. Seven out of the 10 most-traded Asian currencies outside Japan appreciated versus the dollar this year, led by the Philippine Peso, which gained 18 percent.
Strengthen Guidance
The central bank in its statement today also said it will give banks stronger guidance to prevent lending from expanding too quickly. It released the notice after a quarterly monetary policy meeting.
Policy makers raised the one-year lending rate by 0.18 percentage point to 7.47 percent and the one-year deposit rate 0.27 percentage point to 4.14 percent. The PBOC also sought to curb lending growth by increasing banks' reserve requirements on Dec. 8 by 1 percentage point to 14.5 percent of deposits, the 10th increase this year.
``The central bank is now on the track of using a mixture of tools to manage liquidity,'' Xia Bin, a financial research director of the State Council Development Research Center, said in an interview yesterday. ``The increase also helps to offset people's expectation of higher consumer prices.''
Consumer Prices
Consumer prices rose 6.9 percent last month, the fastest pace in 11 years, mainly driven by food and energy inflation. The government named economic overheating and inflation as the key risks for 2008 and announced it will shift to a ``tighter'' monetary policy next year after a meeting of top leaders and financial officials this month.
A stronger yuan may help curb inflation by slowing inflows of cash from record exports, which have pushed foreign-exchange reserves to $1.46 trillion. China overtook the U.K. as the euro area's biggest supplier, according to data released by the European Union statistics office Dec. 18.
U.S. Treasury Secretary Henry Paulson reiterated on Dec. 19 that China should let the yuan appreciate at a quicker pace and said gains since the end of the dollar peg were ``not fast enough.'' Paulson was in China last week as part of talks to urge the nation to increase flexibility in the yuan.
International Pressure
French President Nicolas Sarkozy, European Central Bank President Jean-Claude Trichet and Luxembourg Prime Minister Jean-Claude Juncker all visited Beijing last month to make their case for a stronger Chinese currency.
``The market has expected the yuan will rise versus not only the dollar in the future, but also a basket of currencies including the euro following Sarkozy's visit,'' Industrial & Commercial Bank's Tang said.
Investors may rush to buy new debt with higher coupons after the central bank raised borrowing costs, said Sun Wencun, a fixed-income researcher at Sealand Securities Co. Ltd. based in Beijing.
``New debt offering is hot as the interest rates on offer become more attractive after the rate increase,'' Sun said. ``The rise in short-term rates was bigger than that of the long- term, prompting investors to speculate interest rates have almost reached a peak.''
China Development Bank, the nation's biggest bond seller after the finance ministry, raised the coupon on the 20 billion yuan ($2.7 billion) of seven-year debt it plans to sell Dec. 24 to 5.14 percent, 0.2 percentage point higher than the previously announced rate, according to a statement posted today on the official Chinabond Web site.
The bank said it adjusted the rates on ``requests from the brokers after the central bank increased the rates.''
To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net .
Last Updated: December 21, 2007 06:52 EST
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