The yuan had its biggest monthly loss since January 1994 after China’s government sought to support economic growth and the U.S. currency rallied.
The yuan declined 0.5 percent in August, trimming gains since the central bank ended a two-year dollar peg on June 19 to 0.3 percent. The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major trading partners, gained 2 percent this month.
Central bank governor Zhou Xiaochuan yesterday told a meeting in Beijing that policy makers should maintain financial stability, amid calls for faster appreciation in the currency from trading partners. China’s industrial output expanded 13.4 percent from a year earlier in July, the slowest pace in 11 months, and bank lending increased by the least since March, government reports showed this month.
“Policy makers didn’t allow fast appreciation of the yuan because economic growth has slowed,” said Guan Jiaying, a Beijing-based currency analyst at China Citic Bank Corp. “The central bank also seeks to maintain the yuan’s relative stability versus the currency basket and the Dollar Index rose this month.”
The yuan dropped 0.06 percent to 6.8074 per dollar as of the 5:30 p.m. close in Shanghai, from 6.8030 yesterday, according to the China Foreign Exchange Trade System. The rate declined to 6.8110 earlier today, the weakest level since June 24. Twelve-month non-deliverable forwards slid 0.26 percent to 6.7207, reflecting bets the currency will advance 1.3 percent, according to data compiled by Bloomberg.
Basket of Currencies
Expectations for slower growth in the second half will check the yuan’s appreciation, according to Li Wei, a Shanghai- based economist at Standard Chartered Plc. He said the bank will revise down its earlier estimate for the year-end rate from 6.63 a dollar, without providing a new forecast before publication.
In terms of managing the economy, “the significance of gains or losses in the yuan-dollar rate has declined,” Li said. “Policy makers have shifted their focus onto the yuan level versus the currency basket, or the nominal effective rate.”
The yuan was little changed in August against a basket of trade-weighted currencies, according to nominal effective rates compiled by the Westpac Banking Corp. It has strengthened 2.1 percent versus the euro in the month, while losing 2.3 percent since June 19.
China will seek to publish the nominal effective rate, and it “should gradually become a reference for exchange-rate adjustments,” central bank Deputy Governor Hu Xiaolian said in a statement July 22.
A nation’s balance of payments is the “basis” of analyzing exchange-rate levels, Hu said last month. China’s trade surplus narrowed 21 percent in the seven months through July from the same period a year ago, and the first-half current-account surplus dropped 8 percent on year, according to official data.
Japanese Finance Minister Yoshihiko Noda said in Beijing on Aug. 28 that he told his Chinese counterparts he hopes the nation will work to make more progress on yuan appreciation. The currency is undervalued and an appreciation is in the world’s interest, David Wyss, chief economist at Standard & Poor’s, told a press conference on Aug. 27.
The U.S. Commerce Department is likely to find that the Chinese government illegally subsidized overseas aluminum sales worth $550 million, the Wall Street Journal reported, citing unnamed sources familiar with the situation.
The dispute is primarily about subsidies for electricity and other inputs for the industry, Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington, said in a Bloomberg Television interview. The secondary issue is whether an undervalued yuan plays a role, which the U.S. government has so far dismissed, he said.
“That’s the big blockbuster in this and the other cases,” he said. “We have a quite a bit of a trade spat going on and it will certainly continue for the rest of this year.”
The People’s Bank of China set the yuan’s reference rate 0.12 percent weaker at 6.8105 a dollar, the weakest level since June 21. It is allowed to trade up to 0.5 percent either side of the fixing rate. The central bank sold 12 billion yuan ($1.8 billion) of one-year bills in open-market operations today at a yield of 2.0929 percent, unchanged for the 12th straight week.
Government bonds rose this month. The yield on 10-year notes fell two basis points to 3.25 percent and the rate on securities due in three years lost three basis points to 2.3 percent, according to rates fixed by Bloomberg. A basis point is 0.01 percentage point.