Yuan Forwards Fall as Slower GDP Growth Curbs Appreciation Bets

By Bloomberg News
(c) 2010 Bloomberg News
Thursday, July 15, 2010; 12:00 AM

China's economic growth eased to 10.3 percent in the second quarter, from an 11.9 percent pace in the previous three months, the statistics bureau said today. Industrial production in June rose 13.7 percent from a year earlier, following a 16.5 percent gain in May, and inflation cooled to 2.9 percent from 3.1 percent. Government bonds halted a three-day advance.

"The economy is already on a slowdown trend," said Guan Jiaying, an analyst in Beijing at China Citic Bank Co., a unit of China's biggest state investment company. "To boost economic growth, the authorities won't allow the yuan to gain much this year."

Twelve-month non-deliverable forwards fell 0.1 percent to 6.6636 per dollar as of 5:46 p.m. in Hong Kong, reflecting bets the currency will appreciate 1.7 percent, according to data compiled by Bloomberg. The contracts reached 6.6550 yesterday, the strongest level since June 24.

China's managed float of the yuan's exchange rate will help curb inflation and ease asset bubbles, central bank Deputy Governor Hu Xiaolian, said in a statement on the monetary authority's website today.

The yuan may appreciate 1.2 percent to 6.7 by the end of this year, after strengthening 0.7 percent since a two-year-old peg to the dollar ended on June 19, said China Citic's Guan.

The currency's spot rate declined 0.06 percent to 6.7785, according to the China Foreign Exchange Trade System. That was the biggest drop since July 6.

"Today's data may have caused an increase in demand for dollars because the slowdown means yuan appreciation will decelerate and even stop from time to time," said Liu Dongliang, a Shenzhen-based analyst at China Merchants Bank Co., the country's fifth-largest lender by market value.

Government bonds due in six years and less were little changed as demand rose at a central bank bill auction.

The People's Bank of China gauged appetite for the securities by asking banks to submit orders before announcing a record sale amount of 160 billion yuan ($23.6 billion) of three- year bills yesterday.

"Rumors about the June figures were spread two days ago," said Chen Liang, a fixed-income analyst with Guohai Securities Co. in Shenzhen. "Investors showed enormous demand for the central bank bills, predicting a possible decline in yield."

The bills were sold today at a lower yield for the first time since June 3, on rising demand from finance companies after a cash shortage eased. The interest rate dropped three basis points to 2.65 percent, from the last sale two weeks ago.

The seven-day repurchase rate, which measures funding availability between banks, slid 45 basis points this week to 1.87 percent, according to a daily fixing published by the National Interbank Funding Center. The rate declined to 1.8 percent yesterday, the lowest level since May 20. A basis point is 0.01 percentage point.

The yield on the 2.33 percent government note due in June 2013 was 2.31 percent, and the price of the security was 100.05 per 100 yuan face amount, according to the funding center data.

© 2010 bloomberg.com