Wire: BLOOMBERG News (BN) Date: 2008-06-30 10:18:36
Yuan Posts Quarterly Gain as China Says to Increase Flexibility

By Judy Chen and Belinda Cao
     June 30 (Bloomberg) -- The yuan completed a 12th quarterly
gain, the second-best performer among the 10 most-active
currencies in Asia this year, on speculation the central bank
will allow the currency to strengthen to stem inflation.
     People's Bank of China Governor Zhou Xiaochuan reiterated
on June 27 that China will gradually increase yuan flexibility
after meeting East Asian, Pacific and European central bankers
in Rome. The yuan has gained 6.6 percent against the dollar
this year, approaching the 6.86 percent advance for all of 2007.
     ``Inflation is one motivating factor driving policy makers
to allow yuan gains,'' said Yen Ping Ho, a currency strategist
at JPMorgan Chase & Co. in Singapore. ``We are expecting steady
yuan appreciation for the rest of this year.'' He forecast the
yuan will rise to 6.5 per dollar by the end of 2008.
     The currency climbed 2.3 percent this quarter to 6.8543
per dollar in Shanghai as of 5:30 p.m., compared with 7.0120 on
March 31, according to the China Foreign Exchange Trade System.
It touched 6.8540 today, the highest since a dollar peg was
abolished in 2005.
     The yuan is allowed to trade by up to 0.5 percent against
the dollar each day either side of the so-called central parity
rate. It advanced 0.12 percent today, the biggest gain in eight
days.
     Zhou Xiaochuan said today in Basel, Switzerland that he
can't rule out an interest-rate increase to curb inflation. The
central bank has kept the benchmark one-year interest rate
unchanged so far this year since a widening rate differential
with the U.S. would attract more speculative capital.
     ``After central banks in emerging markets raise borrowing
rates, there will be more space for a rate hike in China,''
said Liu Dongliang, a Shenzhen-based foreign-exchange analyst
at China Merchants Bank Co., the country's sixth largest lender.
``The central bank will probably rely less on currency
appreciation to fight inflation in the second half of this
year.''

                       Bonds Little Changed

     Government bonds were little changed after falling 0.6
percent last week as investors speculated the central bank
would raise interest rates over the weekend, a move that failed
to materialize.
     The yield on the benchmark 10-year treasury rose 16 basis
points to 4.49 percent last week, according to the Bloomberg
China Bond Fixings.
     ``Prices of government bonds stabilized after market panic
pushed yields much higher late last week,'' said Xue Chen, a
Beijing-based fixed-income trader with Guo Hai Securities Co.
``Many institutions sold last week as they needed to control
positions in debt toward the end of the month.''
     China's government bonds delivered investors a 2.5 percent
loss this month, according to an index compiled by China
Government Securities Depository Trust and Clearing Co., the
nation's largest clearing house.
     The yield on the 4.01 percent treasury bond due May 2015
was little changed at 4.275 percent, the Bloomberg China Bond
Fixings showed. The price of the security was at 98.43 per 100
yuan face amount.

*T
For related news:
Top currency news: TOP FRX <GO>
News on China's currency: NSE YUAN IN HEADLINE <GO>
Stories on China economy: NSE CHINA ECONOMY IN WIRE: BN <GO>
*T

--With reporting by Kim Kyoungwha in Beijing. Editors: Jake Lee,
Nicholas Reynolds

To contact the reporters on this story:
Judy Chen in Shanghai at +86-21-6104-7047 or
xchen45@bloomberg.net;
Belinda Cao in Beijing at +86-10-6535-2316 or
lcao4@bloomberg.net.

To contact the editor responsible for this story:
Sandy Hendry at +852-2977-6608 or
shendry@bloomberg.net.

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