Yuan Set for Smallest Monthly Gain Since March 2007 on Exports

By Judy Chen and Kim Kyoungwha

July 31 (Bloomberg) -- The yuan, which is poised for the smallest monthly gain since March 2007, fell on speculation China is slowing the pace of appreciation as the country's economic growth cools.

Traders in the forwards market have pared their bets for the extent of yuan strength in the next 12 months. The People's Bank of China didn't reiterate its pledge to ``increase the exchange rate's flexibility'' in a July 27 statement following a central bank meeting. The yuan's 6.9 percent advance this year, which matches the full-year gain in 2007, has triggered a slowdown in exports.

``Investors have reduced expectations for how far the yuan will rise this year,'' said Chen Yue, a Shenzhen-based foreign- exchange trader at China Merchants Bank Co., the country's sixth- largest lender. ``The appreciation has added to difficulties for the economy.''

The yuan declined 0.11 percent to 6.8344 per dollar in Shanghai as of 10 a.m., from 6.8272 yesterday, according to the China Foreign Exchange Trade System. It has climbed 0.29 percent in July.

The central bank set the reference rate for yuan trading weaker at 6.8388 today. The yuan is allowed to trade by up to 0.5 percent against the dollar either side of the rate.

Non-deliverable forwards contracts show the currency will reach an implied rate of 6.5259 to the dollar in the next 12 months compared with 6.4445 at the end of June. The contracts are agreements in which assets are bought and sold at current prices for future delivery.

Chen expects the yuan to end this year around 6.6 against the dollar.

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