Yuan Falls on Speculation China Will Curb Gains to Help Exports

By Aaron Pan and Judy Chen

July 17 (Bloomberg) -- The yuan fell the most in seven weeks on speculation the government will slow the currency's advance to help exporters weather a global economic slump.

China's currency declined for the first time in three days after a report today showed China's economic growth cooled in the second quarter, increasing pressure on authorities to switch from fighting inflation to protect exporters. The yuan also dropped after the central bank set a weaker daily reference rate, suggesting it's seeking to boost growth and deter speculators.

``If there's a further slowdown in exports, authorities may slow the pace of yuan gains to prevent widespread bankruptcies,'' said Liu Dongliang, a Shenzhen-based foreign- exchange analyst at China Merchants Bank Co., the country's sixth-largest lender.

The yuan declined 0.23 percent to 6.8271 per dollar as of 12:43 p.m. in Shanghai, from 6.8113 yesterday, according to the China Foreign Exchange Trade System. That's the biggest drop since May 27.

The Chinese currency is allowed to trade by up to 0.5 percent versus the dollar either side of the so-called central parity rate, which was fixed at 6.8189 today.

Gross domestic product grew 10.1 percent in the second quarter from a year earlier, the slowest since 2005, compared with a 10.6 percent pace of growth in the first three months of the year, the statistics bureau said today in Beijing.

Inflation Slows

China will likely allow the yuan to appreciate more slowly and relax controls on fuel price increases, the South China Morning Post reported yesterday, citing an unidentified person close to the National Development and Reform Commission.

The Ministry of Commerce has urged China's cabinet to rein in currency gains and increase some export-tax rebates, a ministry official, who declined to be named, said July 14.

Government bonds were little changed after June's inflation rate met expectations.

The yield on the 4.41 percent note due in June 2018 was at 4.43 percent, according to the China Interbank Bond Market. The price was 99.84.

Consumer prices rose 7.1 percent in June, the smallest gain in five months and slowing from 7.7 percent in May. Faster inflation erodes the value of the debt's fixed payments.

To contact the reporters on this story: Aaron Pan in Hong Kong at apan8@bloomberg.net; Judy Chen in Shanghai at xchen45@bloomberg.net.