Dec. 19 (Bloomberg) -- The yuan fell, erasing gains for both the week and the quarter, on speculation the government will keep appreciation in check as the economy slows. Bonds rose.

Commerce Minster Chen Deming said yesterday that China should maintain a stable exchange rate. Policy makers have stalled the yuan’s gains since the end of July as a government report showed the world’s fourth-largest economy expanded 9 percent in the third quarter, the slowest pace since 2005.

“We will see more slowdown next year,” said Liu Dongliang, a Shenzhen-based foreign-exchange analyst at China Merchants Bank Co., the country’s sixth largest lender. “The worsening fundamentals give almost no room for continued yuan appreciation.”

The yuan fell 0.25 percent to 6.8465 a dollar as of 5:30 p.m. in Shanghai, paring this year’s advance to 6.7 percent, according to the China Foreign Exchange Trade System. It declined 0.06 percent this week and is up 0.03 percent since the end of September.

China’s growth may slow to 5 percent next year, Royal Bank of Scotland Plc said today, cutting its forecast from 8 percent.

“This will feel like a recession to the average citizen,” Ben Simpfendorfer, a Hong Kong based analyst at Royal bank of Scotland, wrote in a note.

The U.S. Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six trading partners, rose for a second day to 80.23. The yuan is allowed to trade by up to 0.5 percent against the dollar either side of the daily reference rate, which was set at 6.8357 today.

“The dollar’s liquidity may shrink in the holiday season starting from next week, which will put downward pressure on the yuan,” said Huang Yi, a foreign-exchange trader at Guangdong Development Bank Co. in Guangzhou.

Bonds Rise

Bonds rose, pushing 10-year yields to the lowest level this year, after the government cut fuel prices for the first time in almost two years, cooling inflation that erodes the purchasing power of the fixed payments on debt.

The yield on the 3.68 percent note due September 2018 fell three basis points to 2.69 percent, according to the China Interbank Bond Market. The price advanced 0.25 per 100 yuan face amount to 108.43. A basis point is 0.01 percentage point.

The reductions will “help accelerate declines in consumer prices and give the central bank room to lower interest rates, which is good for the bond market,” said Liang Futao, research manager at Changjiang Pension Insurance Co. in Shanghai.

Bank of China Governor Zhou Xiaochuan reiterated yesterday the nation faces pressure to cut interest rates “based on the inflation outlook.”

China’s consumer prices rose 2.4 percent in November from a year earlier, the smallest increase in almost two years. China’s bonds have gained 11 percent this year, according to Asian local-currency debt indexes compiled by HSBC Holdings Plc.

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

Last Updated: December 19, 2008 05:08 EST