Yuan Declines for First Time in Three Days as Inflation Cools

By Judy Chen and Kim Kyoungwha

Aug. 12 (Bloomberg) -- The yuan fell for the first time in three days after a government report showed China's inflation cooled to the slowest in 10 months in July.

The Chinese currency has declined 0.7 percent since China's Politburo, the Communist Party's top decision-making body, said on July 25 that maintaining economic growth is as important as controlling inflation. President Hu Jintao cautioned this month against overestimating the benefits to the economy from the Beijing Olympics.

``As inflationary pressure eases, policy makers are more concerned about the effect of yuan appreciation on exports,'' said Wang Qing, chief China economist at Morgan Stanley in Hong Kong. ``The government will slow the appreciation pace, and even let the yuan depreciate for one or two months.''

The yuan dropped 0.11 percent to 6.8650 a dollar as of 10:20 a.m. in Shanghai, from 6.8577 late yesterday, according to the China Foreign Exchange Trade System. It has declined 0.5 percent so far in August.

Consumer prices rose 6.3 percent, slowing from 7.1 percent in June, the statistics bureau said today in Beijing. That's lower than economists' estimates of 6.5 percent in a Bloomberg News survey.

The central bank has set the reference rate for yuan trading weaker every day since July 30, the longest stretch since a peg against the dollar was abandoned in 2005. The currency is allowed to trade by up to 0.5 percent on either side of the rate, which was set at 6.8659 today.

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