Yuan Completes First Monthly Loss Against Dollar Since May 2006

By Judy Chen and Jiang Jianguo

Aug. 29 (Bloomberg) -- China's yuan had its first monthly loss against the dollar since May 2006 on speculation weaker global demand will prompt the government to limit currency gains to protect exporters. Government bonds rose.

Slower growth worldwide will weigh on China's exports in the second half of 2008, Vice Commerce Minister Gao Hucheng said yesterday. The yuan's 6.6 percent gain in the first half, which almost matched the advance for the whole of 2007, crimped profits at exporters and cooled sales abroad.

``It's obvious that the government is adjusting the pace of yuan appreciation against the dollar to make sure it won't do more harm to exports,'' said Liu Dongliang, a foreign-exchange analyst in Shenzhen at China Merchants Bank Co., the country's sixth largest lender. ``Most foreign trade transactions are settled in dollars.''

The yuan fell 0.05 percent this month to 6.8350 a dollar as of 5:30 p.m. in Shanghai, according to the China Foreign Exchange Trade System. It weakened 0.11 percent today, halting three days of gains.

China's exports may increase in the second half at the same pace as in the first six months of the year, Gao said at a press conference in Beijing yesterday. Overseas shipments rose 21.8 percent in the first half of 2008, slower than the 27.6 percent growth a year earlier.

The yuan is allowed to trade by up to 0.5 percent against the dollar either side of a daily reference rate, which was set at 6.8345 per dollar today.

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China will start annual checks on how well domestic and foreign banks implement rules on foreign-currency controls, the State Administration of Foreign Exchange, the country's top currency regulator, said in a statement on its Web site today.

The government approved new foreign-currency controls on Aug. 6 to tighten monitoring of cross-border capital payments and deter ``illegal'' inflows that seek to profit from the yuan's one-way appreciation.

The yuan will have a ``minor'' depreciation against the dollar for the rest of this year, and about 4 percent appreciation in 2009, Tao Dong, chief Asia economist at Credit Suisse Group AG in Hong Kong, wrote in an Aug. 26 report.

Government bonds rose, pushing 10-year yields to a two- month low, on concern slowing exports will stall economic growth.

The yield on the 4.41 percent note due June 2018 fell 7 basis points to 4.18 percent, the lowest since July 1, according to the China Interbank Bond Market. The yield dropped 42 basis points this month. The price rose 0.56 per 100 yuan face amount to 101.83. A basis point is 0.01 percentage point.

``Growth will probably decline, easing pressure for the central bank to raise interest rates,'' said Jiang Chao, a fixed-income analyst at Guotai Junan Securities Co. in Shanghai. ``Yields may keep going down.''

China's economy grew 10.1 percent in the second quarter, the fourth successive slowdown. Electricity output rose 12 percent in the first seven months, compared with a 17 percent a year earlier, according to China Electricity Council.

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Jiang Jianguo in Shanghai at jjiang@bloomberg.net.