Yuan strengthening on rumours of tightening monetary policy

Yuan Rises Past 7.6 for First Time Since July 2005; Bonds Fall
By Christina Soon and Belinda Cao

July 3 (Bloomberg) -- The yuan rose past 7.60 to the dollar for the first time since the end of a link in 2005 on speculation the central bank is using the currency's gain as one of the tools to cool economic growth. Bonds dropped.

The currency strengthened by the most in two weeks also on speculation the central bank will sell dollars as China sets up a fund to manage the country's $1.2 trillion foreign-exchange reserves. The government on June 29 approved a 1.55 trillion yuan ($204 billion) sale of government bonds to establish the new asset-management company, which will seek to boost returns.

``The central bank is likely to accelerate the pace of yuan gains to help resolve the economic problems,'' said Jeffrey Tan, a treasury dealer at Maybank Shanghai. ``There has been talk that China's selling dollars, affecting the U.S. currency's performance in global markets.''
The yuan climbed 0.14 percent to 7.5944 against the dollar as of 5:30 p.m. in Shanghai. The currency has risen 9 percent since China dropped a fixed exchange rate to the dollar in July 2005. It may rise as much as 7 percent this year, said Tan from Maybank, a unit of Malayan Banking Bhd., Malaysia's biggest lender.

China is the world's second-biggest holder of U.S. Treasuries after Japan, with $414 billion compared with Japan's $615 billion, according to the Treasury Department. A weaker dollar reduces the returns.

The central bank on May 10 said it won't slash holdings of dollar assets while diversifying its record reserves.

All but three of the 10 most-actively traded Asia currencies rose against the dollar today and 14 of 16 of the world's major currencies gained.

The People's Bank of China reiterated pledges to continue its exchange-rate reform and to give the market a bigger role in setting the yuan's rate, the central bank said today.

New Stock Sales
The trade surplus in China climbed 73 percent to $22.5 billion in May after reaching an all-time high last year. Gross domestic product may increase 10.8 percent in 2007, according to a report by economists at the People's Bank of China's research department, the Beijing-based China Securities Journal reported on June 29. That would be the fastest in 12 years.

China's government bonds declined as new stock issues this week attracted funds away from the bond market.

``The yields on short-term bills are still rising,'' said Li Gang, a Beijing-based bond trader at the Agricultural Bank of China.
The yield on the three-year bond rose 5 basis points to 3.6 percent, according to the China interbank bond market. The price of the 2.66 percent security due August 2010 declined 0.14, or 1.4 yuan per 1,000 yuan face amount, to 97.26. One basis point is 0.01 percentage point. Yields move reversely to bond prices.