China may slow gains in the yuan as it shifts focus to supporting economic growth from combating inflation, Roth Capital Partners LLC and Morgan Stanley said.

The currency's advance will stop at about seven yuan per US dollar by mid-year, 2.6 percent stronger than now, according to Donald Straszheim, vice chairman of Roth Capital, a US investment bank specializing in emerging markets. Forward contracts overestimate the potential for yuan gains, pricing in a nine percent advance in 12 months, Morgan Stanley, the second-biggest US securities firm, wrote in a report.

China raised interest rates six times and allowed the currency to gain seven percent last year to curb inflation and reduce investment in the world's fastest-growing major economy. A recession in the US and cooling demand in Japan and Europe, markets that buy 48 percent of China's exports, will lead to the slowest economic expansion in seven years, Straszheim estimates.

"China's concern will be that the economy becomes too cold, not too hot," Straszheim, a former chief economist at Merrill Lynch & Co, said in an interview. "People ought to be positioning themselves for the straight-line appreciation in the yuan to end."

The yuan rose 0.4 percent this week to 7.1838 in Shanghai, as the government sought to keep the nation's worst snowstorms in five decades from fueling consumer price increases by lowering import costs.

China's benchmark stock index fell two percent to a six-month low yesterday on concern slowing global growth will curb corporate earnings growth.

Manufacturing in the world's fastest growing major economy cooled in January as growth in shipments overseas slowed, with the Purchasing Managers' Index falling to 53 from 55.3 in December, government data showed yesterday. Exports grew at the slowest pace since 2002 in the fourth quarter.

A stronger yuan has made Chinese goods more expensive in overseas markets just as demand slows. China's economy grew 11.2 percent in the fourth quarter from a year earlier, slowing from 11.5 percent in the third quarter.

"If the volatility in global equity markets persists, and evidence of a sharper US slowdown becomes clearer, further interest rate rises by the People's Bank of China may be suspended and yuan appreciation tempered," Stephen Jen, chief currency strategist at New York-based Morgan Stanley, wrote in a January 31 research report.

The 12-month yuan non-deliverable forward rose 0.1 percent to 6.5950 per dollar. Forwards are agreements in which assets are bought and sold at current prices for delivery at a later specified time and date. Non-deliverable forwards involve no physical exchange of currency and are typically settled in US dollars.

(Shanghai Daily February 2, 2008)