CNY (RMB) 01 (May 08 - Feb 16)

[winston]

Yuan plunges on rein speculation

Speculation that Beijing will rein in yuan appreciation to tame inflation preceded the domestic currency's biggest one-day drop against the US dollar in the offshore market for four years yesterday.

One-year yuan non-deliverable forwards plummeted as low as 6.5250 against the greenback on the offshore market, before rising to close at 6.5080 in Shanghai - a decline of 1.41 percentage points from Tuesday's close.

The spot price yesterday closed at 6.9855 against the greenback.

"Some senior finance officials worried by the high inflation believe it is due to the fast rise of the domestic currency. They don't want to see the situation worsening," a mainland source close to the authority told The Standard yesterday.

News of increasing transaction costs for HKD/CNY conversions over the weekend and a Bank of China (3988) economic report suggesting a one-off yuan depreciation support the source's assessment. "These show Beijing is concerned and has no wish for fast yuan appreciation," said one currency dealer.

In a report published on Tuesday, Bank of China economist Tan Yaling expressed concern that the yuan has appreciated more than China can afford.

"It's not favorable to China's economic development. The government might consider to depreciate the yuan in a one-off act so as to offset appreciation expectations," she said.

Since July 2005 the yuan has appreciated by about 18 percent, and measures targeted at dampening inflation have in fact had the opposite effect. "Some foreign firms have used expectations to push up the currency, from a forecast of 10 percent to a 15 percent rise, that's totally unrealistic," Tan wrote. However, a BOC spokesman said this suggestion was solely her personal view.

Citigroup economist Joe Lo concurred with Tan, saying the yuan rose too fast in appreciating 4.2 percent during the past quarter. He suggested its surge will decelerate. "We predict the yuan will rise 8.5 percent in 2008, which means there remains only 3 to 4 percent upside for the rest of the year."

Source: The Standard, HK

[winston]

Chinese Yuan Will Rally in Forwards Market, UBS, Lehman Say By Patricia Lui and Kyoungwha Kim

May 8 (Bloomberg) -- Investors should bet on yuan gains in the forwards market as China's central bank targets a stronger currency to curb inflation, UBS AG and Lehman Brothers Holdings Inc. said.

Contracts that allow holders to lock in a value for the currency in 12 months weakened for a fifth day on speculation policy makers will slow yuan appreciation to protect exporters. There is ``no clear reason'' for the retreat, UBS, the second- largest currency trader, wrote in a research note today.

``The levels are beginning to look attractive,'' Craig Chan, currency strategist with Lehman Brothers in Singapore, said in an interview. ``The inflation risk is very high.''

The yuan has stalled at around 7 per dollar in the past month, after gaining 4.2 percent in the first quarter of the year. People's Bank of China Governor Zhou Xiaochuan said last week export growth is slowing and that inflation will ``moderate'' in the second half of the year.

The currency fell 0.19 percent to 7.0006 in Shanghai as of 10:22 a.m., compared with 6.9871 yesterday, according to the China Foreign Exchange Trade System. The yuan's 12-month offshore non-deliverable forwards fell 1.14 percent to 6.5940, the weakest since February. On April 23, the currency reached 6.9824 to the dollar, its highest since a peg to the U.S. currency ended in July 2005.

Forwards are agreements in which assets are bought and sold at current prices for settlement at a later specified time and date. Non-deliverable forwards are settled in dollars rather than the underlying asset.

Temporary Phenomenon

``This will be a temporary phenomenon before expectations of a faster yuan appreciation is again reflected in the NDF market,'' wrote Nizam Idris, a currency strategist at UBS in Singapore. The slower pace of yuan gains ``has had the desired effect of squeezing out speculators in the NDF market.''

The currency will rise 10 percent against the dollar this year to reach 6.58 by the end of 2008, UBS said. It recommended that investors sell dollars against the yuan for settlement in six months.

``The three-month dollar-yuan NDF is currently pricing in only 4.5 percent annualized appreciation of the renminbi, falling off a peak of almost 18 percent appreciation less than two months ago,'' Nizam wrote.

Consumer prices rose 8.3 percent in March from a year earlier, as the economy grew 10.6 percent in the first quarter. Export growth slowed to 21 percent in the quarter from 28 percent in the same period last year. The trade surplus shrank for the first time in three years, narrowing 11 percent to about $41.4 billion.

Export Slowdown

Exports slowed to a 20.3 percent gain in April, according to 19 economists surveyed by Bloomberg News before a report due as early as this week.

About two-thirds of Chinese textiles companies are almost unprofitable owing to a stronger yuan and rising costs, Shanghai Securities News said today. The government should watch for a possible large-scale exit of speculative capital, which may impose ``huge downward pressure'' on the yuan, the same newspaper reported separately, citing Mei Xinyu, researcher at the Research Institute of the Ministry of Commerce.

UBS dismissed the idea that exporters are increasingly feeling the pinch from the stronger yuan.

``We do no yet see clear macro indicators to suggest this is a serious case for now,'' Nizam wrote. ``There is no evidence at the macro level that manufacturers' margins have been reduced since the turn of the century.''

Source: Bloomberg

[winston]

Ministry sees rising risk of currency reversing by Katherine Ng
Friday, May 09, 2008

A Commerce Ministry report said the risk of the yuan reversing its upward course is building and cannot be ignored.

Mei Xinyu, a ministry researcher, wrote that the non-deliverable forward, or NDF, prices could be an indicator of the yuan's future expectations. "The risk of the yuan reversing course is mainly due to the changing flow of liquidity," Mei said.

The currency continued to slide yesterday in the forwards markets, with the one-year offshore yuan NDF dropping to 6.5990 against the US dollar at its Shanghai close, down from 6.5100. The spot price in Shanghai fell 0.25 percent to close at 7.0052, from 6.9871 against the greenback one day earlier.

NDFs are prevalent in some countries where forward foreign exchange trading has been banned by the government, usually to prevent exchange rate volatility.

Money traders said the prospect of Beijing reining in yuan appreciation amid an economic slowdown has contributed to the reversal of expectations.

The yuan has climbed only 0.35 percent since April, after gaining 4.2 percent in the first three months.

Source: The Standard HK

[winston]

CBRC warns of rule-change risk in yuan bets
Thursday, May 15, 2008

Overseas investors placing money in China's bank accounts betting on yuan gains will face "risks" because the regulators may change the rules, said the China Banking Regulatory Commission's Li Fuan, who heads product innovation.

China's foreign-exchange reserves rose to a record US$1.68 trillion (HK$13.1 trillion) at the end of March, fueling concern that inflows of cash will hamper the government's efforts to damp inflation. Onshore bank accounts in China offer higher interest rates than Hong Kong and the yuan has been allowed to appreciate since 2005 while the city has stuck with a US dollar peg.

"Money inflows for pure speculative purposes will face policy risks," said Li at a conference yesterday in Beijing. "The regulators will make appropriate control rules if needed."

Bank of China (3988), the only yuan clearing bank in Hong Kong, said this month that it raised transaction costs for conversions between the city's currency and the yuan more than sevenfold on May 5 after China Foreign Exchange Trade System increased transaction fees with the bank on the same day.

"China doesn't restrict foreign residents or travelers to open bank accounts in China," said the watchdog's Li. "We will protect normal capital inflows for normal investments in China."

Source: Bloomberg

[winston]

The first step to making the Renmimbi convertible..

==================================

China aims to make yuan convertible in Kyrgyzstan
Wed May 21, 2008

BEIJING, May 21 (Reuters) - China is in discussions with Kyrgyzstan's central bank to make the yuan fully convertible in the central Asian country to promote bilateral trade and investment, the Commerce Ministry said on Wednesday.

A delegation from the People's Bank of China's branch in Urumqi, the capital of Xinjiang region, visited Kyrgyzstan last week.

They found that a key reason for the absence of interbank transactions between the two countries is that the yuan is not convertible on the capital account, according to the ministry's Web site (http://www.mofcom.gov.cn).

"The Chinese side then suggested making the yuan fully convertible in Kyrgyzstan in a step-by-step manner," it said.

The yuan is convertible on the current account for trade in goods and services but China still keeps a tight grip on non-trade-related financial flows on the capital account.

The yuan is being used increasingly as a means of settling trade deals in neighbouring countries such as Mongolia and Vietnam, partly because the currency has been rising steadily since it was revalued by 2.1 percent in July 2005. It has now appreciated a further 16.5 percent since then.

Source: Reuters

[winston]

Standard Chartered Lowers Yuan Forecast as Export Growth Cools
By Judy Chen and Kim Kyoungwha

June 5 (Bloomberg) -- China will slow the pace of the yuan's appreciation as the nation's export growth cools, according to Standard Chartered Plc.

The currency will strengthen to 6.55 a dollar by the end of the year, the U.K. bank's researchers led by Shanghai-based Stephen Green said, lowering their earlier forecast of 6.35. The yuan has risen 1 percent this quarter compared with a 4.2 percent gain in the three months through March. A stronger currency has eroded exporters' profits as growth in shipments decelerated to 22 percent in April, from 31 percent in March.

``The consensus in Beijing has moved against continuing the pace set in the first quarter,'' Stephen Green and the other economists said in a report today. ``Worries about exports are fueling opposition to yuan appreciation.''

The currency was little changed at 6.9429 per dollar in Shanghai as of 12:05 p.m., compared with 6.9390 yesterday, according to the China Foreign Exchange Trade System. The yuan's advance in the first quarter was the fastest since China abandoned a peg to the dollar in July 2005.

China has managed the exchange rate against a basket of currencies including the euro, yen, South Korean won, Hong Kong dollar and the British pound after scrapping the peg.

The Westpac Nominal Effective Exchange Rate, a trade- weighted index for the yuan that includes the euro and the yen, has risen 2.7 percent this quarter. The gauge has climbed 4.2 percent so far this year, compared with the 3.4 percent gain for the whole of last year.

``The Chinese authorities continue to favor a strong nominal effective exchange rate for now to fight inflation,'' the economists said in the report. ``The appreciation is likely to slow further when inflation moderates and growth slows.''

Standard Chartered lowered its third-quarter forecast for the yuan to 6.65 a dollar from 6.55.

China's economic growth may slow ``moderately'' in 2008 due to shrinking global demand and disruptions from disasters, the People's Bank of China said on May 30, in a regional finance report for 2007. Households expect a slower pace of inflation this year than they did in 2007, the report said.

[winston]

Bloomberg: Yuan near highest since peg on inflation fight; bonds decline

The yuan traded near the highest level since a dollar peg was scrapped in 2005 on speculation China will seek a stronger currency to slow inflation.

The yuan has appreciated 2.2% against the dollar this quarter, the best among the 10 most-traded currencies in Asia outside Japan, as Premier Wen Jiabao pledged to tackle inflation. A central bank survey showed that most households expect consumer prices to rise next quarter, according to a statement published on its Web site yesterday.

Steady yuan appreciation, at an annual 10%, will remain an important policy,along with increases in required reserve ratios to reduce inflation, Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong, said in a report yesterday.

Inflation quickened to 8.1% in the first five months of this year, compared with 4.8% for all of 2007. A strengthening currency lowers import costs.


Source: Bloomberg

[winston]

Yuan Falls Most in a Month as China Seeks to Curb `Hot Money'
By Judy Chen and Belinda Cao

July 4 (Bloomberg) -- The Chinese yuan fell the most in a month as the nation seeks to curb inflows of speculative capital that may cause inflation to quicken 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. This year's 6.5 percent gain in the yuan, which has almost matched the 7 percent advance in 2007, has lured foreign funds and boosted foreign-exchange reserves to over $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 fell 0.12 percent to 6.8589 per dollar as of 5:30 p.m. in Shanghai, according to the China Foreign Exchange Trade System. The yuan 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.

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 6.5085 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.

Market Determined

The best solution to pare 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 in the Chinese-language Journal. The central bank would be able to re-impose controls at any time, 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.

Government bonds 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. The nation's debt handed investors a loss of 0.4 percent this 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 bond due in November 2014 rose 1 basis point to 4.36 percent, according to the China Interbank Bond Market. The price fell 0.051 to 99.92. A basis point is 0.01 percentage point.

[kennynah]

just TOL...and a little far fetched one...

fundamentally, one reason for a country's currency to lower against its major trading partner's currency, could be becos of the lower need for the former's currency...in this case, renminbi is not appreciating, could be due to a lesser need for it by US...means, actually a slower china exports to USA.... this then leads to the conceptualisation that prc is slowing in her growth going forward...

[winston]

Not sure as the Renmimbi is not fully convertible..

I have heard some Economists mentioned before that the reason, why the Renmimbi is not fully convertible. is because a lot of money would leave China if it is fully convertible...