Yuan rebounds

The yuan rebounded against the dollar in the spot and offshore forwards markets on Wednesday after the Chinese government denied magazine reports that a senior official saw a possibility of moderate yuan depreciation. China Briefing magazine on Tuesday quoted Zhang Xiaoqiang, deputy head of the National Development and Reform Commission (NDRC), as saying the yuan might drop as low as 7 versus the dollar because of a weak Chinese economy.
This triggered a steep fall by the yuan in the forwards market on Tuesday. On Wednesday, the magazine issued a correction, claiming the comment had been said not by Zhang but by Liu Mingkang, head of the China Banking Regulatory Commission (CBRC).
But the NDRC and the CBRC denied both reports, stating their officials had not been interviewed about the yuan, and the magazine subsequently said the reference to a dollar/yuan level of 7 "cannot be attributed to either official". It cited "an error in transcript and translation". The State Administration of Foreign Exchange, the currency regulator, restated China's commitment to yuan stability.
SAFE deputy director Deng Xianhong said on Wednesday that avoiding big swings by the yuan was a major task for China, and that he expected the currency to stay stable with no major fluctuations. One-year dollar/yuan non-deliverable forwards which had jumped as high as 7.0100 bid late on Tuesday from 6.9350 at Monday's close, were back down at 6.9609 in late trade on Wednesday.
Their latest level implied yuan depreciation of 1.79 percent over the next 12 months from the day's spot mid-point, down from as much as 2.49 percent implied on Tuesday. Spot yuan also rose against the dollar despite global dollar strength overnight. The Chinese currency closed at 6.8380 against Tuesday's finish of 6.8395 in quiet, narrow trade.
Many forex dealers in Shanghai said that while moderate yuan depreciation in the long run could not be ruled out, if Chinese economic growth did not start recovering and the dollar strengthened further in global markets, they expected China to keep the yuan flat against the dollar for the foreseeable future.
The Chinese central bank has used its control of market mechanisms and indirect intervention when necessary to keep spot yuan in a range of about 6.81-6.88 since last July, partly because it does not want to prompt capital outflows from China.
Both Premier Wen Jiabao and central bank governor Zhou Xiaochuan have praised the yuan's stability and said the global financial crisis made it particularly important. There was also the possibility that a Chinese official may have wanted to raise the topic of yuan weakness publicly, but then denied his comment to minimise the impact on the market.
The government may want to underline the threat of yuan depreciation to deflect US pressure on China to appreciate its currency as a way of narrowing the bilateral trade gap. US Secretary of State Hillary Clinton is due to visit Beijing for the first time in her role this week.
A further possibility is that China's economic slowdown, especially a plunge in exports during January, may have reignited a debate within the Chinese government over currency policy. But any shift in policy would have to be approved at the highest level, traders believe.
Traders noted that the Chinese central bank set Wednesday's yuan mid-point against the dollar only marginally lower, at 6.8363 against 6.8352, despite a large 1.3 percent jump by the US Dollar Index overnight. This suggested the central bank did not want the yuan exchange rate to reflect more than a small fraction of the dollar's global strength.
Dollar/yuan volatilities, which reflect demand to hedge against a big exchange rate move, also implied the market was not expecting a major change in Chinese currency policy. One-year volatilities fell back to 8.75 percent bid from Tuesday's close of 9.50 percent. On Tuesday, they jumped as high as 10.00 percent from Monday's finish of 8.25 percent.