Yuan Falls Most Since End of Peg as China Signals Growth Focus

By Judy Chen and Kim Kyoungwha

July 28 (Bloomberg) -- China's yuan declined by the most since a dollar peg ended in 2005 after the Politburo signaled a shift in focus to maintaining economic growth, fueling speculation the government will slow gains to aid exporters.

The Politburo, the Communist Party's top decision-making body, wants to cool inflation and maintain ``steady and relatively fast'' expansion, state-run China Central Television reported on July 25. The yuan's 6.8 percent advance this year is eroding the value of overseas sales as manufacturers contend with the slowest domestic growth since 2005.

``The yuan's appreciation will slow significantly in the second half, especially in the fourth quarter,'' said Lu Zhengwei, an economist at Industrial Bank Co. in Shanghai. ``For the first time, the government replaces preventing overheating with maintaining growth among its top priorities.''

The yuan fell 0.32 percent to 6.8410 per dollar in Shanghai as of 5:30 p.m., from 6.8189 late last week, according to the China Foreign Exchange Trade System. The currency has climbed 0.25 percent versus the dollar in July.

The goal of achieving stable growth has been made more difficult due to uncertainties and instabilities of the global economy, CCTV reported, citing the Politburo. Gross domestic product rose 10.1 percent in the second quarter from a year earlier, after expanding 10.6 percent in the first.

China will keep the yuan stable in a ``self-initiated, controllable and gradual manner,'' the People's Bank of China said in a statement on its Web site yesterday, after the monetary policy committee's second-quarter meeting. The statement didn't reiterate the central bank's pledge to ``increase the exchange rate's flexibility,'' included since the third quarter of 2007.

Clear Signal

``The omission of `flexibility' is a clear signal that the central bank will slow the pace of yuan gains,'' said Shi Lei, a Beijing-based analyst at Bank of China Ltd., the country's largest foreign-currency trader. ``It has reduced reliance on using currency appreciation to curb inflation.''

The central bank set a weaker daily reference rate for the yuan today at 6.8277. The yuan is allowed to trade by up to 0.5 percent against the dollar either side of the so-called central parity rate.

Government bonds due in more than three years fell on concern that inflation will erode returns on longer-dated securities. China's inflation was 7.9 percent in the six months through June, the fastest pace since 1996.

``The inflation rate is still at a high level,'' said Yang Hui, a fixed-income analyst with Citic Securities Co. in Beijing. ``Most funds won't enter the debt market first, even if there were some loosening in the monetary policy to maintain growth.''

Yang said yields on longer-term debt rose faster than short-term securities. The People's Bank of China has sold three-month bills at around 3.40 percent during weekly auctions since Dec. 14.

The yield on the 3.69 percent treasury note due in April 2013 rose 6 basis points to 4.2 percent, according to the China Interbank Bond Market. The price of the security dropped 0.25 per 100 yuan face amount to 97.84.

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Kim Kyoungwha in Beijing at kkim19@bloomberg.net.