China paving the way for yuan's rise, to sell 3-year bills

BEIJING: US Treasury Secretary Timothy Geithner will hold talks in Beijing on Thursday against a background of fresh signals from Chinese policymakers, including the central bank, that they might be paving the way to let the yuan resume its rise.

The National Development and Reform Commission (NDRC), the nation’s top economic planner, said China would monitor exchange rate risks facing exporters, while an economist from the agency said Beijing should edge toward a more flexible yuan.

The statement suggested policymakers are weighing what may happen if they let the yuan recommence its climb after keeping it yoked to the dollar since mid-2008.
On Wednesday China’s central bank set the yuan’s mid-point at 6.8259 per dollar, the strongest for the yuan in 10 months.

Rates to rise soon?

Adding to the speculation that Beijing is preparing to raise interest rates and allow gains in the yuan to help curb inflation, China’central bank said it will sell three-year bills for the first time since June 2008. The sale of 15 billion yuan ($2.2 billion) in the securities on Thursday will be followed by issuance every two weeks, the People’s Bank of China said in statement. The bills may yield 2.75% at the sale, compared with 1.93% on one-year bills sold on Tuesday, according to the median estimate in a survey of nine finance companies.

Selling higher-yielding bills may be a precursor to the first increase in benchmark lending rates in more than two years and allowing yuan gains, said Jiang Chao, an analyst at Guotai Junan Securities Co, the nation’s largest brokerage by revenue. Policy makers from China to India have begun withdrawing economic stimulus this year, seeking to prevent asset-price bubbles as Asia leads the recovery from a global recession. “This is meant to pave the way for the central bank to raise interest rates or resume yuan appreciation,” said Jiang. “The PBOC can drain liquidity by issuing bills if the interest- rate hike or appreciation attracts more hot money.”

Central bank adviser Li Daokui said the nation may raise rates this quarter should the inflation rate breach 3%, the China Securities Journal reported on Wednesday. Consumer prices rose 2.7% in February from a year earlier.

The bills will drain cash from the economy by providing an alternative to lending, according to Xu Xiaoqing, a bond analyst at China International Capital Corp, the nation’s first Sino- foreign investment bank in Beijing.

“The central bank needs to use higher-yielding bills to attract banks so that they won’t make too many loans,” said Xu, who sees a rate increase this quarter. “Three-year bills can lock up banks’ cash for longer periods, which will push up money-market rates and bond yields.”

The yuan will presumably be at the top of Geithner’s agenda when he meets Chinese vice-premier Wang Qishan on Thursday on his way home from financial partnership talks in India. A US Treasury spokesperson, accompanying Geithner in Mumbai, declined to talk about the subject matter of the meeting and said there would be no further statements about it.

Washington has pressed Beijing to lift the value of the yuan, which critics say is held so low against the dollar that Chinese producers enjoy a grossly unfair advantage in global markets.
NDRC is a sprawling agency in charge of industrial policy which has a stronger voice than almost any other government agency, including the central bank, in China’s decision-making process about the currency.

Zhang Yansheng, director-general of the Institute for International Economic Research, a think-tank under the NDRC, said China wanted a freer-floating currency but was also wary of the potential pitfalls.

“We also want the yuan exchange rate to be more flexible and based on market supply and demand relation, but the U.S. should be clear that it is a gradual process,” he said.

“Currently, Chinese enterprises do not have the capacity to hedge against currency risks and China also lacks an established system to manage foreign exchange risks.”

Beijing let the yuan rise 21 percent against the dollar between July 2005 and July 2008 before effectively re-pegging the currency near 6.83 to the dollar to help its exporters surmount the global financial crisis.