Yuan Drops to Seven-Week Low as Inflation Cools; Bonds Decline

By Judy Chen and Belinda Cao

Aug. 12 (Bloomberg) -- The yuan fell, touching a seven-week low, on speculation slowing inflation will prompt policy makers to aid exporters by limiting currency gains. Bonds fell.

The Chinese currency has declined 0.6 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. A government report today showed consumer prices rose in July at the slowest pace in 10 months after the yuan climbed 6.6 percent against the dollar in the first half.

``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 0.08 percent to 6.8632 a dollar as of 5:30 p.m. in Shanghai, from 6.8577 late yesterday, according to the China Foreign Exchange Trade System. It today reached 6.8760 per dollar, the weakest since June 23.

Yuan declines increase the amount of local currency exporters receive for their overseas sales and make Chinese products more competitive in the global market.

Consumer prices rose 6.3 percent from a year earlier last month, after increasing 7.1 percent in June, the statistics bureau said today in Beijing. That's less than the 6.5 percent gain forecast by economists in a Bloomberg News survey.

China has allowed the yuan to decline 0.1 percent since the end of June to help exporters weather a global economic slowdown and deter so-called hot money, speculative funds attracted by anticipated gains in the currency.

Managed Lower

The central bank manages the yuan against a basket of currencies by setting a daily reference rate versus the dollar, around which the local currency is permitted to trade by up to 0.5 percent on either side. The rate, set at 6.8659 per dollar today, has been reduced on each of the past 10 days, the longest stretch of declines since a peg to the dollar ended in 2005.

It'll be especially tough to make money on the yuan during the Olympics, said Sergey Dergachev, one of the emerging-market portfolio managers at Union Investment in Frankfurt, Germany's third-biggest fund manager, with the equivalent of $285 billion in assets.

``For the next two to three weeks, we'll see zero movement because we have the Olympic games there, and all the attention will be to support the events and security issues,'' Dergachev said.

Bonds Fall

China's 10-year government bonds fell on concern inflation will exceed yields for some time to come.

``Even if the inflation rate will drop to 5 percent next year, the current yield, 4.5 percent on 10-year debt, won't be enough to catch up with that,'' said He Xiuhong, a fixed-income analyst at GF Securities Co. in Guangzhou, the nation's third- largest brokerage by revenue.

The central bank sold 62 billion yuan ($9 billion) of one- year sterilization bills, the most of the maturity since April 22, in today's open-market operations. The yield was unchanged at 4.06 percent.

``The central bank has to be more aggressive in absorbing liquidity in the financial system if it's flooded with cash resulting from fast foreign-exchange inflows,'' said Zhao Qingming, an economic researcher in Beijing at China Construction Bank Corp.

The yield on the 4.41 percent bond due June 2018 climbed 2 basis points to 4.49 percent. The price of the security fell 0.16 per 100 yuan face amount to 99.36. A basis point is 0.01 percentage point.

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Belinda Cao in Beijing at lcao4@bloomberg.net