Yuan forwards gain after Snow remarks

Yuan forward contracts rose yesterday after United States Treasury Secretary John Snow said China was considering widening the range in which the currency could trade.

Mr Snow was quoted as saying that the Chinese authorities 'are considering widening the band' which was 'to be encouraged'.

It was the second time this month that Mr Snow had spoken publicly on the subject. Last week he said that China was 'interested in moving towards market-based flexible exchange rates'.

However, officials from the State Administration of Foreign Exchange have repeatedly stated there is no schedule for removing restrictions on the yuan, which has been fixed at about 8.30 to the US dollar since 1994.

'The fact [the yuan peg] has come up again makes it look like a conscious effort to raise this periodically,' said James Malcolm, a regional currency strategist at JP Morgan. 'If he had said it once, then maybe it would be an off-the-cuff comment. When it comes up again, it begins to take on more significance.'

Mr Malcolm said that it was still not clear whether it was a deliberate policy by the administration of US President George W. Bush or just a nod in the direction of the business lobby in the US which had been pushing for a stronger yuan.

American manufacturers have complained that China is artificially keeping its exchange rate low, harming US exports.

One-year non-deliverable forwards - an indicator of the yuan's future value - strengthened yesterday, implying the yuan would be worth about 8.162 to the dollar in 12 months' time, an increase of about 1.6 per cent.

ING Financial Markets Asia chief strategist Markus Rosgen said it was becoming increasingly apparent that the yuan was seriously undervalued and that the Bush administration was moving it to the top of its agenda.

He said political pressure on China would increase over time and should that fail, then the issue could be taken to the World Trade Organisation.

Mr Rosgen said ING valued the yuan at least 10 per cent stronger than existing levels, which would still leave Chinese exports extremely competitive.