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China Money: Time to move yuan rise bets to long-term NDFs

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China Money: Time to move yuan rise bets to long-term NDFs
2010-08-17 05:28:28 GMT (Reuters)


* Weak growth data of key economies sends warnings to China

* China c.bank begins slowing yuan appreciation vs dollar

* Dealers scale back 12-month yuan appreciation to 3 pct

* Yuan seen rising 5-6 pct in 2 years, more in longer term

By Lu Jianxin and Jacqueline Wong

SHANGHAI, Aug 17 (Reuters) - A slew of weak data from major global economies has set off alarms bells in Beijing, prompting the People's Bank of China to slow the yuan's climb against the dollar partly to protect the country's exports.

Domestic foreign exchange dealers have cut their forecasts of yuan appreciation to only 3 percent in a year's time, down from 5 to 6 percent at the time the PBOC abolished its two-year peg of the yuan to the dollar in mid-June.

Dealers say now is the time to focus on less traded dollar/yuan non-deliverable forwards (NDFs) of longer tenors because they significantly undervalue the China currency.

"It's the right time to shift positions to long-term contracts because there will be few opportunities for the yuan to appreciate sharply within a year," said a senior dealer at a major European bank in Shanghai.

Domestic investors remain confident that China's strong productivity growth compared with its trading partners will ensure the yuan will appreciate sharply in the long term, he added.

The two-year contract was quoted at 6.5540, implying 24-month yuan appreciation of 3.72 percent, far behind dealers' expectations of a rise of 5 to 6 percent in two years.

Rivalling Japan as the world's second-largest economy, China is expected to enjoy robust productivity growth compared with its partners and to maintain hefty trade surpluses with them.

NO MOVE IN SHORT TERM

The PBOC has guided the yuan lower since last week when the Chinese currency hit an intraday high of 6.7644 to the dollar -- its strongest since the landmark July 2005 yuan revaluation, as the United States and Japan published data pointing to the possibility of a double dip and even deflation.

The yuan rose as high as 0.91 percent against the dollar since it was depegged on June 19, but it now stands only 0.4 percent higher.

"The woes of major global economies will somehow spill over to China by slowing its exports to these countries, giving the PBOC a reason to slow yuan appreciation despite external pressure," said a dealer at a Chinese state bank in Beijing.

"And it appears that these economies are unlikely to walk out of their dire situations at least in 2010, so the extent for the yuan to appreciate is very limited in the short term."

Echoing the government's views, Vice Commerce Minister Zhong Shan wrote in an official magazine this week that China must keep the yuan basically stable as part of a policy kit to support the country's international trade.

Benchmark one-year dollar/yuan NDFs were bid at 6.6720 on Tuesday morning, implying the yuan will rise 1.89 percent in a year, leaving little room to short dollars compared with dealers' forecast for a rise of 3 percent in a year.

Short-dated three-month NDFs traded at 6.7700, pricing in appreciation of 0.41 percent in three months, which dealers said remains a risky bet considering the probability that China may totally halt the yuan's appreciation over the next three months if major global economies continue worsening. (Editing by Kazunori Takada)

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