Yuan Drops Most in Week as Inflation Dips; Bonds Little Changed

By Judy Chen and Belinda Cao

Sept. 11 (Bloomberg) -- China's yuan declined by the most in almost a week against the dollar on concern that the central bank will slow the currency's gains as inflation pressures ease. Bonds were little changed.

A government report showed yesterday that consumer prices climbed 4.9 percent in August from a year earlier, the slowest pace in 14 months, edging closer to the government's 4.8 percent target for 2008. The central bank set the reference rate for yuan trading at 6.8457 against the dollar today, the lowest in three weeks.

``Slowing inflation reduces the possibility of accelerated yuan appreciation,'' said Huang Yi, a foreign exchange trader at Guangdong Development Bank Co. in Guangzhou. ``The yuan will stay stable against the dollar for the rest of this year before the country's exports recover.''

The yuan dropped 0.08 percent to 6.8443 a dollar as of 12:57 p.m. in Shanghai, from 6.8385 yesterday, according to the China Foreign Exchange Trade System.

Exports grew 21.1 percent in August, down from July's 26.9 percent gain, the customs bureau said yesterday. China has halted the yuan's appreciation against the dollar since the end of July as policy makers seek to maintain economic expansion and shore up exports.

U.S. Labor Secretary Elaine Chao said on Aug. 26 that the Bush administration will keep pressing China to let the yuan strengthen at a faster pace to help close a trade deficit with the Asian nation that ballooned to a record $256 billion in 2007.

Hard to Break

``It will be hard for the yuan to break through the key level of 6.8 by the end of this year,'' said Ken Peng, an economist at Citigroup Inc. in Shanghai. ``But the government won't allow a depreciation which would hurt its relationship with the U.S.''

Shenzhen, an export hub for goods including textiles, toys and shoes, is facing an economic situation ``even tougher and more severe'' than the 1997 Asian financial crisis, the South China Morning Post said today, citing an interview the city's mayor Xu Zongheng gave to a radio program.

The city's economy expanded 10.5 percent in the first half, the slowest pace since it became a special economic zone in 1979, the Hong Kong-based newspaper said.

Government bonds were little changed after the yield on the 30-year debt dropped the most in more than seven months yesterday as investors shifted their focus to slowing economic growth after government data showed inflation is cooling.

The yield on the 30-year bond declined 6 basis points, the most since Feb. 1, to 4.62 percent yesterday, according to rates compiled by the nation's biggest debt clearing house. A basis point is 0.01 percentage point.

Focus on Growth

``Yields tended to go down as concerns shifted to growth rather than inflation, which slowed faster than expected,'' said Yang Hui, a fixed-income analyst with Citic Securities Co. in Beijing.

China's economic growth declined for four straight quarters to 10.1 percent by June amid a global slowdown.

The rally in bonds yesterday was also driven by China Development Bank's 10-year bond sale yesterday, Yang said. The debt yielded 4.28 percent at the auction, about 20 basis points lower than traders had estimated.

The yield on the 4.16 percent bond due February 2023 was little changed at 4.34 percent in Shanghai, according to the China Interbank Bond Market. The price of the security held at 98.13 per 100 yuan face amount.

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