Markets

Yuan forwards head for biggest gain this year

By Bob Chen (China Daily)
Updated: 2010-06-19 09:16

HONG KONG - Yuan forwards headed for the biggest gain this year amid mounting calls for China to allow its currency to resume appreciation before leaders from the Group of 20 nations meet on June 26-27 in Toronto.

The US Congress may push China to revalue the yuan if the nation doesn't move on its own after the G20 summit, US House of Representatives Ways and Means Committee Chairman Sander Levin said on June 16. China's one-year swap rate rose to the highest level since October 2008 on speculation the central bank will push up borrowing costs in money markets higher to cool the economy.

"Obviously there's pressure building up on China to be more flexible on the yuan," said Gerrard Katz, head of foreign-exchange trading at Standard Chartered Plc in Hong Kong. "Now that the dollar's under pressure again and equities are up, there's going to be more hot money inflows into China."

Bonds slide

The central bank last month ordered lenders to set aside more funds as reserves for a third time this year, boosting the reserve-requirement ratio to 17 percent for the biggest banks.

The yuan is "China's currency", and not meant for global discussions, Vice-Foreign Minister Cui Tiankai said on Friday in Beijing. Exports to Europe may have already suffered from the continent's debt crisis, the China Business News cited Wang Zhiping, director general of the China Foreign Trade Centre, as saying.

Policymakers have kept the yuan's value against the dollar stable since July 2008 to help exporters weather a global economic slump. Prior to that, the currency strengthened 21 percent over three years.

One-year swap contracts, in which the floating seven-day repurchase rate is exchanged for a fixed payment, surged 17 basis points to 2.44 percent.

Government bonds fell after the finance ministry sold three- and five-year debt at yields higher than analysts' and traders' predictions.

The central bank sold the three-year debt at 2.77 percent, 32 basis points more than the median estimate in a Bloomberg News survey of analysts and 11 basis points more than the rate on similar-maturity bonds sold on Thursday. The yield on five-year securities was 2.90 percent, 25 basis points higher than analysts' forecast. A basis point is 0.01 percentage point.

Related readings:  China money rate gains on BOC debt sale; yuan forwards decline  Yuan forwards fall as Europe's woes worsen  Yuan is overvalued, not undervalued: report Currency is off limits at G20 summit

The 28.6 billion yuan of three-year notes that were sold drew bids for 1.02 times the amount offered, and the 15.2 billion yuan of five-year debt was subscribed 1.06 times. The average ratio at previous treasury bond auctions this year was 1.7 times.

"The abnormally high yields suggest the auction would have failed if the ministry could have settled for less than the planned sales amount," said Hu Hangyu, a Beijing-based fixed-income analyst with Citic Securities Co, China's biggest listed brokerage. "The outcome reflected tight funding availability in the interbank market after the central bank raised reserve requirements again last month."

The 2.33 percent note due in June 2013 climbed 7 basis points to 2.5 percent, and the price of the security slid 0.2 per 100 yuan face amount to 99.52, according to the National Interbank Funding Center.

Bloomberg News