China Money: Yuan rise seen certain, but not soon

* Forwards show rising expectations of yuan rise

* Forward move comes after central bank policy report

* But no major change seen in currency level anytime soon

* Export recovery next year key to forex policy shift

By Karen Yeung and Chen Yixin

SHANGHAI, Nov 12 (Reuters) - Confidence is building that China is preparing to let the yuan appreciate again against the dollar but policy makers are expected to move slowly, which argues against any immediate market move for some months.

China has shackled the yuan tightly around 6.83 per dollar since the middle of last year, to help its exporters during the global downturn, stalling a rally in place since the currency's landmark revaluation in 2005.

Markets have started to factor in expectations that Beijing will have to unleash the yuan next year as a global economic recovery becomes more established and they received a nod towards a shift from the central bank's third-quarter monetary policy report, released on Wednesday.

However, market players said while China faces increasing diplomatic pressure to let the yuan rise against the dollar, domestic factors would determine when policy makers give the currency more rein.

And those domestic factors, crucially a resumption of exports growth, would not be in place until next year.

"We believe the decision makers are those at the State Council level who still consider exports growth too weak to change the exchange rate," Goldman Sachs said in a research note.

The central bank's policy report departed from Beijing usual wording on keeping the yuan "basically stable at a reasonable and balanced level" and said major currencies and capital flows will be considered in guiding the yuan. [ID:nSP466424]

Capital flows have been a focus for Beijing policymakers who fear that speculative "hot money" from abroad could inflate asset price bubbles. The more the currency is perceived as undervalued, the more that speculative inflows could be attracted by anticipation of yuan appreciation.

China is facing increasing diplomatic pressure to let the yuan rise.

Asia Pacific finance ministers on Thursday called for market-oriented exchange rates. While the yuan has been stable against the dollar, the currencies of many of China's exporting rivals have risen against the U.S. currency. [ID:nSP510963]

At last week's G20 meeting, there were signs of grumbling from emerging economies, notably Brazil, over a weak yuan. [ID:nL8180461]

But currency market players doubt these latest developments will change the outlook for the yuan beyond the expectations built into market thinking in recent months that China would let the yuan start rising again next year.

Until skidding to a halt last year, the yuan had risen around 6 percent a year from July 2005.

"We think the yuan/dollar (rate) will remain roughly unchanged at 6.8 for at least another six months, unless the dollar depreciates much more against other major currencies in the meantime," UBS said in a note on Thursday.

The bank projected a resumption of yuan appreciation in mid-2010, in line with its forecast in late in October.

GESTURE

Some analysts said the central bank's statement could have been made as a gesture ahead of U.S. President Barack Obama's Nov. 15-18 visit to China. Obama told Reuters this week he would raise the currency issue during his trip. [ID:nOBAMAVIEW]

But they said domestic conditions determine changes in foreign exchange policy, not diplomatic pressure.

"International pressure currently is not strong enough, so yuan policy may stay stable in the short term as China has typically relied on domestic fundamentals to decide policy," said a trader at a European bank in Shanghai.

But domestic factors could come into play in coming months to persuade Beijing to let the yuan rise. These include raising the yuan's exchange rate to calm capital inflows and offset the threat of imported inflation.

Most importantly, Beijing is likely to let the yuan rise once exports rebound from the global downturn. The dollar peg has sought to protect export-oriented firms hit hard by the global economic downturn. [ID:nSHA214323]

China's exports decreased 13.8 percent in October from a year earlier, worse than forecast, after a 15.2 percent drop in September and a string of falls reaching back into 2008.

But UBS expects China's exports to swing to growth in coming months because of the comparison with a low base a year earlier and a recovery in global demand as the world emerges from the downturn. It projected persistent and large trade surpluses in the foreseeable future.

Yuan appreciation expectations are reflected in the offshore non-deliverable forwards CNY1YNDFOR= market.

On Oct. 20, the one-year NDF hit a 14-month low of 6.5680, implying yuan appreciation of 4.55 percent from the daily reference rate set by the central bank.

The forwards retraced when spot dollar/yuan rates CNY=CFXS remained stable, but have begun falling again and hit a three-week low of 6.5850 on Thursday, implying 12-month appreciation of 3.67 percent. Implied appreciation moves inversely with the forwards.

The volatility in the forwards contrasts with stable spot rates, guided by the central bank's daily mid-point, or reference rate CNY=SAEC.

But the central bank has also begun to nudge its mid-point, from which the dollar can only stray by 0.5 percent during the day's trade, marginally higher in recent days. On Wednesday it reached 6.8267 yuan to the dollar, matching an Oct. 15 high that was the strongest since May 25. (Editing by Edmund Klamann and Neil Fullick)