Yuan Has Biggest Weekly Drop in 20 Months on Growth Concerns

Aug. 13 (Bloomberg) -- China’s yuan had for its biggest weekly decline in 20 months on speculation the central bank is tempering gains to protect exports amid signs growth in the world’s third-largest economy is slowing.

The People’s Bank of China set the daily reference rate for currency trading at 6.8035 per dollar, 0.27 percent lower than yesterday’s close of 6.7851. The Dollar Index, which tracks the yuan against the nation’s six major trading partners, has rallied this week as investors sought the perceived safety of the greenback after data around the world signaled the economic recovery is faltering.

“It’s clear Beijing doesn’t want to see appreciation bring more troubles to the economy,” said Ken Peng, a Beijing-based economist for Citigroup Inc. “The fixing is somewhat related to the move in the dollar index.”

The yuan declined 0.4 percent this week, the biggest five-day drop since December 2008, to 6.7957 per dollar as of 5:30 p.m. in Shanghai, according to the China Foreign Exchange Trade System. The currency weakened 0.16 percent today.

Traders also pared bets for appreciation after government data showed this week China’s export growth slowed in July, industrial output increased at the slowest pace in 11 months and bank lending increased by the least since March.

Dollar Index

China should continue to carry out its pledge on currency reform and increase the yuan’s flexibility to accelerate economic restructuring, Xia Bin, a government economist and an adviser to the central bank, said in an interview with the People’s Daily Overseas Edition. More flexibility will also help reduce appreciation expectations, he said.

The Dollar Index rose 2.6 percent this week, the biggest gain since the period ended May 7, according to data compiled by Bloomberg.

China loosened controls on the yuan on June 19 after keeping the exchange rate at about 6.83 per dollar for almost two years. The currency has since strengthened 0.5 percent.

Twelve-month non-deliverable forwards declined 0.09 percent this week, reflecting bets the currency will strengthen 1.6 percent in a year from the spot rate. Citigroup’s Peng said the yuan may climb 1.4 percent to 6.7 by year-end.

Bonds Advance

Government bonds rose this week as investors sought the safest assets on concern the economy is slowing. Banks extended 532.8 billion yuan ($78.4 billion) of new local-currency loans last month, compared with 603.4 billion yuan in June. M2, the broadest measure of money supply, grew 17.6 percent from a year earlier in July, compared with an increase of 18.5 percent in the prior month.

“There’s no doubt slower growth will continue in the second half,” said Qu Qing, a Shanghai-based bond analyst at Shenyin Wanguo Securities Co. “New debt offerings will sell well on rising demand, and secondary-market yields will continue to slide.”

The finance ministry sold 28 billion yuan of 30-year bonds today at an average yield of 3.96 percent. The sale drew bids of 2.13 times the amount on offer, compared with 1.91 times at the last similar-dated auction on July 28 and 1.41 times on June 18.

The yield on the 2.76 percent security due in July 2017 dropped three basis points this week to 2.88 percent, according to the National Interbank Funding Center.

Qu predicted the yield on 10-year bonds will drop to 3 percent this year from 3.22 percent.

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at xchen45@bloomberg.net. Belinda Cao in Beijing at lcao4@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.