China's Yuan Rises to Strongest Since Dollar Peg Ended in 2005

By Belinda Cao


Dec. 24 (Bloomberg) -- The yuan climbed to the highest since a dollar link was scrapped two years ago after the central bank said exchange-rate flexibility will increase, raising speculation it plans to widen the daily trading band.

Policy makers allowed the currency to rise 6 percent in 2007, almost twice as much as last year, to cool an export-led expansion that has flooded banks with cash and driven inflation to an 11-year high. U.S. Treasury Secretary Henry Paulson this month said it is in China's interest to allow faster gains. The yuan is now limited to a 0.5 percent move either side of a daily reference rate set by the central bank.

``The yuan's trading band versus the dollar may be expanded in the near future,'' said Li Huiyong, an economist at Shenyin Wanguo Research and Consulting Co. in Shanghai. ``This factor supported the acceleration of the yuan's gain.''

The yuan rose 0.11 percent to 7.3621 per dollar at 2:19 a.m. in Shanghai, bringing gains this month to 0.5 percent. The central bank set the reference rate at 7.3315 today, according to the China Foreign Exchange Trade System.

The People's Bank of China said in a statement on Dec. 21 that it will let the market play a bigger role in setting the exchange rate.

The central bank put a proposal to the State Council, China's cabinet, to use currency gains to curb money supply, the official Securities Times reported today, citing an unidentified person from ``the authorities.'' The paper said the proposal, which included opinions of local and foreign economists, suggests approaches including a faster yuan gain over time and a ``one-off'' appreciation.

Trading Band Discussion

China's leaders discussed the widening of the trading band to 0.8 percent each side of the so-called parity rate or conducting a revaluation, the Hong Kong-based Ta Kung Pao newspaper reported on Nov. 27, citing an unidentified person. The yuan has never touched the 0.5 percent daily trading limit.

Vietnam's central bank widened its trading band today for the dong to 0.75 percent on either side of a fixed daily rate from 0.5 percent, according to Dao Xuan Tuan, head of foreign exchange at the central bank's currency department.

Paulson on Dec. 19 urged the nation to allow faster gains whilst refraining from naming China a currency manipulator. Senator Charles Grassley, a Republican from Iowa, and other lawmakers are threatening punitive legislation unless China's government loosens controls on the yuan.

New Debt Supply

China's trade surplus, which surged 52 percent in the 11 months through November to $238.1 billion, has driven the country's foreign-exchange reserves to an all-time high of $1.46 trillion, making it difficult for the government to slow growth.

The economy expanded 11.5 percent in the third quarter, while inflation reached 6.9 percent in November. The central bank has raised interest rates six times this year in a bid to curb prices and prevent the economy from overheating. It last raised the benchmark deposit and lending rates on Dec. 20.

In the nation's bond market, China Development Bank, the biggest bond seller after the finance ministry, raised the coupon on a 20 billion yuan ($2.7 billion) sale of seven-year debt today. The coupon was raised to 5.14 percent, 0.2 percentage point higher than the previously announced rate, according to a Dec. 21 statement on the Chinabond Web site.

The adjustment was based on ``requests from brokers after the central bank increased rates,'' the bank said.

The higher coupon and falling money market rates will mean there should be no problem in selling the debt, said Xie Xin, a bond trader with Industrial Bank Co. Ltd. in Shanghai. ``No other big long-term debt offering is expected by the year-end.''

China's benchmark interbank seven-day repo fixing dropped 5 basis points to 2.08 percent, the lowest since Nov. 16. The Shanghai interbank offered rate, or Shibor, for one-month funding declined 27 basis points to 3.23 percent, the lowest since Oct. 8. A basis point is 0.01 percentage point.

Debt sales were limited this year because of rising tax revenues. China collected 4.8 trillion yuan of revenue in the first 11 months of this year, 34 percent more than the same period in 2006, and government spending rose 25 percent to 3.7 trillion yuan, finance minister Xie Xuren said on Dec. 19.