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Yuan Completes Worst Month Since Peg as Europe Woes Hurt Exports

The yuan had its biggest monthly loss since a peg ended in July 2005 as Chinese exports slumped amid a worsening debt crisis in Europe.

Overseas sales rose 4.9 percent in April from a year earlier, the smallest gain since 2009, according to official data on May 10. Shipments to the European Union fell 2.4 percent, with sales to Italy sliding 20 percent. Chinese manufacturing may shrink for a seventh month in May, a preliminary report by HSBC Holdings Plc and Markit Economics showed last week. The People’s Bank of China weakened its reference rate for the yuan by 0.9 percent this month as Europe’s woes bolstered demand for dollars.

“China’s export growth is likely to stay low for quite a while with weak demand from Europe,” said Tommy Ong, senior vice-president of treasury and markets at DBS Bank (Hong Kong) Ltd. “We could see officials have the intention to hold the yuan stable as global financial conditions are unfavorable.”

The yuan declined 0.92 percent this month to close at 6.3690 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency dropped 0.18 percent today and touched this year’s low of 6.3783. The central bank set a daily reference rate, around which the yuan can fluctuate by as much as 1 percent, of 6.3355 per dollar, the weakest level since March 15.

Versus the euro, China’s currency is the strongest it’s been in a decade. The yuan reached 7.8381 per euro today, the highest since June 2002. The cost of protecting Spanish government bonds with default swaps climbed to a record yesterday and a Greek poll showed support for anti-austerity parties ahead of elections next month that may determine Greece’s future in the euro.

One-month implied volatility for the yuan against the dollar, a measure of exchange-rate swings used to price options, climbed 15 basis points, or 0.15 percentage point, to 2.2 percent.

In Hong Kong’s offshore market, the yuan fell 0.16 percent today to 6.3662 per dollar, extending this month’s loss to 1.04 percent. Twelve-month non-deliverable forwards traded at 6.4306, a 0.96 percent discount to the onshore spot rate, according to data compiled by Bloomberg.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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