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Yuan flat vs dollar; China unlikely to allow rise

Posted on: April 4, 2009

Reuters – Saturday, April 4

* G20 agreement, Chinese data long-term positive for yuan

* But China unlikely to allow significant yuan rise soon

* Chinese lifts yuan mid-point only marginally

* Spot yuan closes below mid-point

* NDFs imply 1-year yuan appreciation vs dollar of 1.65 pct

By Lu Jianxin

SHANGHAI, April 3 – The yuan closed almost flat against the dollar on Friday as traders said China was unlikely to permit significant appreciation any time soon, despite strong Chinese data and G20 leaders’ deal to aid the world economy.

By spurring a global economic recovery, the G20’s $1.1 trillion deal could eventually help China regain enough confidence in its own economy to resume appreciating the yuan, after holding its currency steady against the dollar since last July because of the global crisis. [ID:nL1230573]

Stephen Green, analyst at Standard Chartered Bank, said the G20’s plans to boost the resources of the International Monetary Fund, increase countries’ Special Drawing Rights and make more trade financing available were indirectly positive for China.

“These measures should result in a significant stabilisation of external demand much sooner than would have been the case otherwise, and therefore offer a major boost to China’s growth prospects,” he wrote in a report.

“Much depends on the detail and quality of implementation, but given that some 30 percent of China’s GDP growth in recent years has been driven by external demand, we believe that China will benefit significantly from these measures.”

Also, data on Thursday and Friday fuelled expectations that the Chinese economy would start rebounding in coming months. The official Purchasing Managers’ Index for March rose to 52.4 from 49.0 in February, marking its first time in expansionary territory since September; China’s chief statistics official said this showed the economy might have bottomed out. [ID:nPEK25397]

And the official China Securities Journal reported on Friday, quoting unnamed sources, that new bank lending reached 1.3 trillion yuan in March, not far from January’s massive record of 1.6 trillion yuan. [ID:nSHA21946]

Interest rate traders think such strong lending makes it very unlikely that the central bank will see any need to ease monetary policy further. Offshore yuan interest rate swaps climbed to multi-month highs on Friday. [ID:nSHA25414]


But currency traders said they believed Chinese authorities remained a long way from concluding the economy was strong enough to withstand major yuan appreciation against the dollar.

“The financial markets are encouraged by the outcome of the G20 summit, but there are risks of excessive optimism because it will take time for the world economy to recover,” said a dealer at a U.S. bank in Shanghai.

A dealer at a big Chinese commercial bank in Shenzhen said: “The PMI and lending figures are impressive, bu yuan to appreciate now.”

Yuan appreciation in the first half of last year drew strong criticism from China’s export sector and some influential economists.

“The market consensus is that the government will continue to keep the yuan stable in coming weeks if not months, until other parts of the Chinese economy, in particular foreign trade and industrial production, show clear signs of a recovery,” the Chinese bank dealer said.


In an apparent signal that it does not want the yuan to rise significantly for now, the Chinese central bank set its daily mid-point against the dollar <CNY=SAEC> only marginally higher on Friday, at 6.8320 against Thursday’s reference rate of 6.8341.

The rise reflected only a small part of the dollar’s weakness in global markets on Thursday, when the U.S. Dollar Index <.DXY> tumbled 1.3 percent.

One-year dollar/yuan non-deliverable forwards <CNY1YNDFOR=> fell as far as a seven-month low of 6.7210 bid on Friday afternoon from Thursday’s close of 6.7410. But they later bounced back to 6.7418.

NDFs’ low implied yuan appreciation of 1.65 percent against the dollar over the next 12 months from the day’s mid-point. That was the largest implied yuan appreciation since last September, but it was still small compared to levels of 10 percent or more reached in early 2008.

Spot yuan <CNY=CFXS> closed at 6.8348 against the dollar, barely changed from Thursday’s finish of 6.8349.

The fact that it traded almost entirely below the mid-point on Friday was another sign that the market does not expect any surge by the yuan in the short term, regardless of the dollar’s movement in global markets, traders said.


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