Wire: BLOOMBERG News (BN) Date: 2008-09-18 08:33:47
Yuan Drops, Forwards Slump Most Since 1999, on Growth Concern

By Judy Chen and Belinda Cao
     Sept. 18 (Bloomberg) -- China's yuan declined and forward
contracts weakened by the most since 1999 on speculation the
government is limiting currency appreciation as the economy
slows and financial turmoil escalates. Bonds fell.
     Contracts that let traders bet on the yuan's value in 12
months fell as much as 3.4 percent, the most since February 1999
as Cao Wenlian, deputy director at the National Development and
Reform Commission, the country's top planning agency, said the
central bank needs to ease monetary policy to support growth.
     ``Investors speculate that the government has stopped the
appreciation to boost the economy,'' said Liu Dongliang, a
Shenzhen-based foreign-exchange analyst at China Merchants Bank
Co., the nation's sixth-largest lender. ``The yuan has much
downward pressure in the short term.''
     The yuan weakened 0.05 percent to 6.8405 against the dollar
as of 4:27 p.m. in Shanghai, from 6.8370 yesterday, according to
the China Foreign Exchange Trade System.
     ``The central bank should speed up the liberalization of
interest rates. Monetary policy can't just target inflation
while ignoring growth,'' Cao said at a conference in Beijing
today.
     China has slowed the yuan's gains this quarter as the
country's gross domestic product rose 10.1 percent in the three
months through June, the smallest increase since 2005. The
People's Bank of China this week cut the key one-year lending
rate to 7.20 percent from 7.47 percent, the first reduction in
six years, signaling a shift in policy to support growth.

                          Forwards Slump

     The yuan's 12-month non-deliverable forwards contracts slid
2.3 percent to 7.0035 per dollar. Forwards are agreements in
which assets are bought and sold at current prices for
settlement at a later-specified time and date.
     ``It's clear the appreciation has ended,'' said Ka Chung
Law, a strategist at the Hong Kong branch of Bank of
Communications Ltd., China's fifth-biggest lender. ``But China
won't let it depreciate because that would prompt an abrupt
outflow of capital.''
     Law expected the currency to stay within the range between
6.8 and 6.9 against the dollar for as long as one year.
     Government bonds dropped, halting two days of gains after
the central bank reduced rates.
     The yield on debt due in three years or more dropped at
least 7 basis points yesterday, according to an index compiled
by the nation's biggest debt clearing house. Bonds due in 15
years advanced the most in the last two days, with the yield
dropping 30 basis points. A basis point is 0.01 percentage
point.

                          Sales Starting

     ``The market stabilized and there were more people starting
to sell,'' said Yang Hui, a fixed-income analyst with Citic
Securities Co. in Beijing. ``It's a correction from the fast
gains in the last two days.''
     In open-market operations today, the central bank sold 7
billion yuan ($1.02 billion) in three-month bills at a yield of
3.357 percent, compared with 30 billion yuan a week ago. The
yield slid for the first time since February from the previous
3.3978 percent. The yield on one-year bills the central bank
sold on Sept. 16 also dropped the first time this year to 4.0258
percent.
     The yield on the 4.01 percent bond due May 2015 rose 3.8
basis points to 3.55 percent, according to the China Interbank
Bond Market. The price of the security slid 0.22 per 100 yuan
face amount to 102.67.

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>

--Editors: Garfield Reynolds, Simon Harvey

To contact the reporters on this story:
Judy Chen in Shanghai at +86-21-6104-7047 or
xchen45@bloomberg.net;
Kim Kyoungwha in Beijing at +86-10-6535-2309 or
kkim19@bloomberg.net.

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

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