Yuan options more expensive as officials pledge no increase

The premium charged for the right to buy yuan in three months over contracts to sell has more than tripled this year to the most among 44 currency options tracked by Bloomberg. The 2 percentage point difference is the most since China last ended a fixed-exchange rate in July 2005, so-called risk-reversal rates show. Expectations for price swings also have tripled in the fastest implied volatility rise among the currencies.

Chinese Premier Wen Jiabao will outline policies for controlling consumer prices and reducing the most-populous nation's reliance on overseas sales at an annual conference of lawmakers starting Friday. A stronger yuan would help achieve both goals. While President Barack Obama has urged China to let it climb to aid U.S. manufacturers, Chinese exporters say a gain of more than 2 percent may wipe out their earnings.

“It's the optimal timing to bet on yuan appreciation,” said Richard Benson, who oversees US$14 billion as an executive director at Millennium Global Investments in London.

The People's Bank of China has held the currency almost unchanged at about 6.8 per dollar since July 2008 as it protected exporters from the global financial crisis, which left 20 million Chinese migrant laborers unemployed. Policy makers had allowed the yuan to strengthen 21 percent in the previous three years.

Traders are betting it will gain 0.8 percent by June, three-month non-deliverable forwards show. The yuan will rise 4.2 percent to 6.55 by the end of 2010, according to the median estimate in a Bloomberg survey of 20 analysts. The consensus was 2.2 percent weaker at 6.7 in September.

Jim O'Neill, the chief Goldman Sachs Group Inc. economist who coined the term BRICs for Brazil, Russia, India and China in 2001, said last month that “something is brewing” and predicted policy makers will allow a one-time 5 percent gain.

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