Yuan Heads for 1-Month Low on Concern China Will Halt Gains

By Belinda Cao and Judy Chen

Aug. 11 (Bloomberg) -- The yuan was headed for the lowest close in a month against the dollar on speculation policy makers will halt a 26-month run of gains to help exporters weather a global slowdown and sustain economic growth.

The central bank today lowered the reference rate for yuan trading for a ninth straight day, the longest run of declines since a peg against the dollar was scrapped in 2005. The currency is allowed to trade by up to 0.5 percent on either side of the rate, which was set at 6.8638 per dollar.

``The weaker reference rates are a response to the increasing difficulties in the export sector,'' said Lu Zhengwei, an economist at Industrial Bank Co. in Shanghai. ``The bankruptcies of labor-intensive export companies will significantly increase the country's unemployment rate.''

The yuan fell 0.09 percent to 6.8651 a dollar as of 1:25 p.m. in Shanghai, poised for the weakest close since July 7, according to the China Foreign Exchange Trade System. It's still up 6.4 percent this year, the biggest gain among Asia's 10 most- used currencies outside Japan.


The currency retreated in each of the last two weeks after the government on July 25 said it aims to sustain economic growth as well as combat inflation.

The economy expanded in the second quarter at the slowest pace since 2005 and figures due this week will show exports last month had the smallest gain since February and the trade surplus shrank, according to economists surveyed by Bloomberg. The statistics bureau today reported producer prices rose 10 percent from a year earlier in July, the fastest pace since 1996.

Inflation `a Challenge'

``The government has adopted a pro-growth policy, but it will allow a small appreciation in the yuan in the second half as inflation still remains a challenge,'' said Tang Liang, a foreign-exchange trader at the Beijing branch of Industrial & Commercial Bank of China Ltd., the nation's largest bank.

So-called non-deliverable forward contracts indicate investors have been scaling back bets on currency gains. They suggest the yuan will reach 6.6135 per dollar in the next 12 months, an advance of 3.8 percent from the current exchange rate.

China's currency gained 10.3 percent in the past year and has strengthened 17 percent since May 2006, the last time it posted a monthly loss. The yuan has dropped 0.5 percent so far this month.

Bonds Fall

Government bonds due in more than three years fell after the finance ministry sold 20-year notes at an average yield of 4.94 percent, 0.05 percentage point more than the median estimate in a Bloomberg survey.

``Demand for the debt fell short of expectations,'' said Nie Shuguang, a Shanghai-based fixed-income analyst at Industrial Bank Co. ``That drove yields higher.''

The government auctioned 24 billion yuan ($3.5 billion) in 20-year bonds, the first sale of the maturity this year. Yields were bid as high as 5 percent, according to traders at the Industrial and Commercial Bank of China and China Construction Bank Corp. in Beijing.

The yield on the 4.5 percent bond due May 2038 was traded at 4.95 percent, 3 basis points more than that on Aug. 8 according to data published on Chinabond Web site, which is run by the nation's biggest debt clearing house. The price fell to 93.03 per 100 yuan face amount. 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.