(Reuters)
Updated: 2007-03-06 11:23

China's yuan ended lower against the dollar, giving up early gains after a stock market slide offset officials' bullish comments about economic growth as the country's parliament kicked off its annual session Monday.

China's money market yield curve steepened and bond yields were mostly flat to higher, as officials' comments before the parliament session fueled expectations that inflation may rise toward 3 percent this year, traders said.

The yuan closed at 7.7500 to the dollar, down from 7.7465 at Friday's close, under pressure from a nearly 4-percent fall in China's benchmark stock index in the afternoon session. The stock index closed down 1.6 percent.

The currency hit an intraday high of 7.7389 to the dollar in early trade, within striking distance of last Wednesday's peak at 7.7378, its highest intraday trading level since Beijing revalued the yuan and depegged it from the dollar in July 2005.

The yuan was buoyed by comments by central bank governor Zhou Xiaochuan who said on the sidelines of the parliament session that China would consider widening the yuan's daily trading range when necessary, although he did not give a timetable.

Dealers said a surge in the Japanese currency also added to uncertainty in the foreign exchange markets, leaving some investors wary about buying the yuan.

The yen has risen as market players frantically unwind carry trades, which had played a role in the yen's broad slide that took it to a 21-year low on a trade-weighted and inflation-adjusted basis in January.

"Investors are worried that the yuan may, like the yen, also be affected by global carry trade," said a dealer at a major Chinese commercial bank.

Fundamentals Strong

Chinese shares tumbled in line with a 4-percent drop in Hong Kong and falls in other markets, but by the close they recovered most of their intraday losses, boosted by officials' comments at the parliamentary session.

"Figures released during the parliamentary session indicate that economic fundamentals remain strong, so the index will certainly test new highs again this year," said economist Zhu Jianfang at China Securities.

"But the stock market is likely to be more volatile this year, even with periods of roller-coaster trading, mainly because of heavy profit-taking pressure," he said.

The stock index has dropped 8.7 percent from an all-time intraday peak of 3,049.771 points hit last Tuesday. Its volatile trade last week, including an 8.8 percent tumble by the close on Tuesday, rattled global markets.

The benchmark index climbed 130 percent in 2006 and many analysts consider it vulnerable to bouts of selling by investors who want to lock in profits from those gains.

Premier Wen Jiabao said in a keynote report to the parliament Monday that the government was working on the assumption that gross domestic product would grow about 8 percent this year, the same target it set last year when GDP actually rose 10.7 percent.

A Monday mess for Wall Street

He acknowledged that this year's growth outcome might also be wide of the mark, but said the target had been set to signal the importance of increasing efficiency, saving energy, cutting pollution and avoiding the blind pursuit of growth.

On the money market, buying of central bank bills was focused on maturities below one year with the 90-day yield, while the one-year bill yield rose to 2.8070 percent from 2.8050 percent, after falling for a week.

"Traders are reluctant to buy longer-term bills because of rising inflation worries," said a trader at a European Bank.

Central bank governor Zhou said on Monday ahead of the parliament session that China's consumer inflation rate was a little high.

"Official comments on inflation have given little, if any, boost to money market confidence," said economist Wang Haoyu at First Capital Securities in Shenzhen.