* Key NDFs now imply 3-plus pct yuan rise vs dlr in 12 mths
* Dealers say yuan may resume appreciation early next year
* Yuan may rise 6 pct annually once it resumes appreciation
* Data show yuan under pressure to resume appreciation
By Lu Jianxin and Edmund Klamann
SHANGHAI, Oct 22 (Reuters) - A recent surge in the yuan's value against the dollar implied in one-year offshore non-deliverable forwards (NDFs) may still lag China's economic reality and thus fail to reflect the potential value of the Chinese currency in a year's time.
Yuan appreciation in 12 months implied in the benchmark NDFs, calculated from the Chinese central bank's daily mid-point, or reference rate, rose to 4.55 percent on Tuesday, its highest since August 2008.
It has since retraced, on dollar short-covering in line with global dollar movements and as players grew cautious when the surge was not followed by signs the People's Bank of China might allow the yuan to appreciate.
But speculators such as foreign hedge funds are increasingly putting their money, via positions in the offshore NDFs, on a renewed yuan rise, after the PBOC halted the Chinese currency's rise in July 2008 when the global financial crisis struck.
They have had plenty of official hints to encourage them, as concerns mount over inflation and capital inflows that could be addressed by renewed yuan appreciation.
China said on Thursday its annual economic growth rate quickened to 8.9 percent in the third quarter, up from the second quarter's 7.9 percent pace.
That followed a confident pronouncement by the government late on Wednesday that the economy had recovered from the global financial crisis, sending its clearest signal yet that it might gradually unwind its ultra-loose pro-growth policies.
The State Council, or cabinet, also put inflation squarely back on the government's agenda, saying it was important to manage inflation expectations in coming months alongside securing steady economic growth.
ENCOURAGING DATA
Last week, two sets of PBOC data had already offered support for the case for China to resume yuan appreciation, showing a sudden jump in capital flowing into China and a shift in the make-up of the country's money supply.
"The central bank may be forced to consider allowing the yuan to appreciate in coming months, possibly early next year," said a dealer at a Chinese commercial bank in Shenzhen.
Once the PBOC resumes the sort of appreciation seen in the three years to the middle of 2008, the yuan could rise at an annual rate around 6 percent, according a Reuters survey of six dealers trading on the China Foreign Exchange Trade System.
"We base our forecast on the average annual rate of appreciation of the yuan from July 2005 to July 2008," said a dealer at a U.S. bank in Shanghai. "That means the 3-plus percent rise now implied in the NDFs may still lag the upside the yuan can achieve in a year."
After a revaluation in 2005, the yuan rose 19 percent against the dollar before coming to a grinding halt in 2008. Dealers now believe China may not necessarily be resisting yuan appreciation but simply awaiting a catalyst, such as imported inflation, to allow the yuan to start rising again.
The government is clearly aware of the potential problems of an undervalued yuan.
On Tuesday, PBOC Vice-Governor Ma Delun warned that a weak dollar could pose inflationary risks by spurring a flood of liquidity into China, both from a rebound in the trade surplus and via investors betting on yuan appreciation.
BENEFITS TO CHINA
Last week's PBOC data took the market by surprise, pointing to pressures for China to resume a yuan rise for its own benefit, not just to passively follow global dollar weakness.
One set showed the PBOC and other financial institutions in September spent the most money since April 2008 to buy up new foreign exchange flows into the system, a sign that huge amounts of capital are flowing into China again, due at least partly to mounting pressures for the yuan to rise against a weak dollar.
In addition, money supply data showed much of the September inflows might have been absorbed by the central bank itself, reversing a recent trend.
The PBOC has been buying most dollars flowing into China in recent years to keep the yuan stable, translating into a flood of yuan liquidity in Chinese markets, although its dollar purchases had slowed sharply during the year from mid-2008.
China's M0, or money in circulation, jumped 15.96 percent by the end of September from a year earlier, with the central bank injecting net cash of 257 billion yuan into the system in the first three quarters of this year, the data showed.
In sharp contrast, M0 rose 11.52 percent year-on-year by the end of August, with the central bank injecting net cash of only 19 billion yuan into the system in the first eight months.
This will add fresh pressure on Beijing to mop up funds in the system as base money will multiply liquidity in circulation. Chinese markets have already been awash with liquidity this year as state banks lend aggressively to support the economy.
First Capital Securities economist Wang Haoyu in Shenzhen said capital inflows would be key in pushing China to allow the yuan to resume appreciating.
"Another wave of hot money inflows will flood China's markets with liquidity, pushing its asset prices into a huge bubble and threatening the economy's stability and long-term development." (Editing by Kazunori Takada)