Yuan Falls Most in a Month as China Seeks to Curb `Hot Money’
July 4, 2008 · Print This Article
Yuan Falls Most in a Month as China Seeks to Curb `Hot Money’
July 4 (Bloomberg) — The yuan fell by the most in a month as China seeks to curb inflows of speculative capital that may accelerate inflation from near a 12-year high.
China should “temporarily” allow the yuan to trade freely to deter one-way bets for appreciation in the currency, according to researchers at the Chinese Academy of Social Sciences quoted in the China Securities Journal newspaper today. The 6.4 percent gain in the yuan this year, which has almost matched the 7 percent pace of 2007, has attracted foreign funds and swelled foreign-exchange reserves to more than $1.68 trillion.
“The central bank may slow the appreciation from time to time to increase market uncertainty and trim capital inflows,” said Li Tao, a foreign-exchange trader at Shenzhen Development Bank Co. “It will probably keep the currency little changed for one month, like the unexpected stagnation in April.”
The currency dropped 0.17 percent to 6.8627 per dollar in Shanghai as of 2:35 p.m., from 6.8510 yesterday, according to the China Foreign Exchange Trade System. The yuan climbed 0.35 percent in April, the least since March 2007. It was little changed this week, following four weeks of gains.
The State Administration of Foreign Exchange, China’s currency regulator, said July 2 that it will tighten controls on exporters’ foreign-exchange settlements and credit for trading to deter hot money flowing in through fake deals.
Reduced Forwards Bets
Traders in the forwards market have reduced bets since April on how far the yuan will rise. Non-deliverable forwards show the currency will reach an implied rate of 6.5135 to the dollar in the next 12 months compared with 6.2755 on April 7. The contracts are agreements in which assets are bought and sold at current prices for future delivery.
The best solution to pare speculators’ expectations of faster yuan gains is to make the exchange-rate more market determined, He Fan and Zhang Yue at the Chinese Academy of Social Sciences wrote in the article published in the Chinese-language Securities Journal paper. The central bank could re-impose controls at anytime, they said.
Increasing inflows of hot money will weaken the government’s effort to tighten credit and curb inflation, said the researchers, forecasting the yuan will gain 10 percent if freely floated.
Bonds Little Changed
Government bonds due in more than one year were little changed before the release of reports on economic growth, money supply and trade data in the next two weeks.
Central bank Governor Zhou Xiaochuan said on June 30 that he couldn’t rule out the possibility of raising interest rates.
Government bonds handed investors a loss of 0.4 percent since the end of last week, according to a local-currency debt index compiled by HSBC Holdings Plc.
“There won’t be much change in the bond market before the announcement of GDP for the first half,” said Qu Qing, a fixed- income analyst at Shenyin Wanguo Research & Consulting Co. in Shanghai. The central bank “probably won’t raise rates within this year.”
The yield on the 4.35 percent treasury bond due in November 2014 was 4.37 percent, according to the China Interbank Bond Market. The price of the security was 99.87 per 100 yuan face amount.
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