Yuan Advances as Dollar Drops Versus Euro, Yen; Bonds Rise
2008-10-29 03:41:59.560 GMT

By Judy Chen and Belinda Cao
     Oct. 29 (Bloomberg) -- The yuan advanced for a second day
against the dollar, extending yesterday's biggest gain in three
weeks, as the greenback weakened on speculation the Federal
Reserve will cut interest rates today. Government bonds rose.
     The People's Bank of China set a stronger reference rate
for yuan trading for the first time in three days as the dollar
dropped against the euro and the yen. Non-deliverable forwards
contracts show the yuan may depreciate 2.6 percent to 7.0135 in
the next 12 months.
     ``The dollar's weakness temporarily boosts the yuan,'' said
Liu Dongliang, a Shenzhen-based foreign-exchange analyst at
China Merchants Bank Co., the country's sixth largest lender.
``But the stability principle is still dominating the yuan
market.''
     The yuan climbed 0.1 percent to 6.8340 a dollar as of 11:26
a.m. in Shanghai, from 6.8390 yesterday, according to the China
Foreign Exchange Trade System. Liu said the yuan will trade
between 6.8 and 6.9 for the rest of this year.
     The currency fell in August and September amid speculation
China was stemming gains to counter the impact of a global
economic slump on exports. The yuan has strengthened 0.25
percent this month after policy makers pledged to focus on
exchange-rate stability.
     The U.S. Dollar Index traded on ICE futures in New York,
which tracks the currency against those of six trading partners,
snapped three days of gains, falling 1 percent to 86.12.
     The central bank has managed the yuan against a basket of
currencies, including the euro and the yen, since a dollar peg
was scrapped in July 2005. The yuan is allowed to trade by up to
0.5 percent against the dollar either side of the so-called
central parity rate, which was fixed at 6.8318 today.

                          Bonds Advance

     Government bonds rose for a third day on speculation the
central bank will stop sales of one-year bills in open-market
operations, leaving banks with funds to buy other debt
securities.
     The People's Bank of China yesterday didn't issue the one-
year bill, which is its most frequently used security to manage
liquidity. The central bank will now sell the debt every two
weeks instead of its weekly auctions, according to a statement
posted on its Web site Oct. 27. The change is meant to ``ensure
ample liquidity,''it said.
     ``Investors are speculating the PBOC will finally cancel
the issues of one-year bills,'' said Pang Aihua, a bond analyst
with China Citic Bank Corp. in Beijing. ``The outstanding one-
year PBOC bills are very hot now, and people also will have to
buy other securities.''
     Bills sold by the central bank maturing October 2009
yielded 2.98 percent on the Interbank Bond Market, 4 basis
points lower than yesterday's rate compiled by China's largest
debt clearing house. The yield slid 11 basis points yesterday,
the biggest decline since Oct. 9, the data showed.
     The yield on the 4.018 percent government note due May 2015
fell 2 basis points to 2.92 percent, according to the China
Interbank Bond Market. The price of the security climbed 0.12
per 100 yuan face amount to 104.40. A basis point is 0.01
percentage point.

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, 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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