Despite the recent pullback in yuan non-deliverable forwards (NDFs) following the rally of US dollar, yuan will not depreciate, said Bank of China's executive vice president Zhu Min. He was speaking at the renminbi-denominated bond launching ceremony in Hong Kong.

"Strength of the dollar is just a rebound," Zhu said, "There is no evidence showing that it can be sustainable."

Yuan rebounded against the dollar in spot and forward markets yesterday. Spot yuan closed at 6.8365 versus the dollar, slightly up from Wednesday's close of 6.8434. Offshore dollar versus yuan NDFs down at 6.7580 in late trade from Wednesday's close at 6.7875.

Three-month offshore dollar versus yuan NDFs rose as high as 6.8491 on Wednesday, surpassed the spot yuan, implying yuan deprecation against the dollar in the next 12 weeks.

Zhu emphasized that the exchange rate of yuan against the dollar should not be the only gauge. "We should also look at the rate of yuan against Australian dollar and yen," he added.

The robust economic growth on the mainland and the strong labor productivity are favorable for the strength of yuan, Zhu said.

However, analysts saw a slowing pace of yuan appreciation. Hang Seng Bank's latest report pointed out that the appreciation of the yuan mid-rate against the dollar was 4.1 percent in the first quarter, 2.3 percent in the second quarter and only 0.4 percent in the two months ended August.

A strong currency was one factor behind the mainland's slower export growth, Hang Seng Bank's analysts wrote. "With inflationary pressure easing, the authorities have greater leeway to slow the rate of appreciation of the yuan."

Zhu believes that the yuan is in a rising pace for the long term supported by strong fundamentals, but he added that "the rate would become more volatile when the currency becomes market-driven and financial market condition will also affect the currency".

Bank of China is selling 3 billion yuan of two-year and three-year bonds in Hong Kong, and the coupon rate is 3.25 percent and 3.4 percent respectively, with a denomination of 10,000 yuan each.

The bank will sell the bonds to both institutional and retail investors, and not less than 1 billion yuan for the retail tranche. Subscriptions will kick-off today and continue until September 16.

Zhu said the coupon rate of the bond is attractive compared with the Hong Kong dollar deposit rate. "The high liquidity products should be able to provide the investors with more investment channel."

This is the second renminbi-denominated bonds offering from Bank of China in Hong Kong, and also the fourth bonds issued in this year after China Construction Bank, China Export-Import Bank and Bank of Communications.

(HK Edition 09/05/2008 page2)