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Yuan Forwards Drop Most in a Month as Data Points to Outflows

China's Premier Wen Jiabao
Wen Jiabao, China's premier. Photographer: Michele Tantussi/Bloomberg

Yuan forwards fell by the most in more than a month on speculation capital outflows will take pressure off policy makers to speed up gains in the currency.

The yuan also declined as concern U.S. lawmakers won’t be able to reach agreement on cutting the budget deficit reduced demand for emerging-market assets. Yuan holdings at Chinese banks fell for the first time since December 2007, dropping a net 24.9 billion yuan ($3.9 billion) in October, according to a statement on the People’s Bank of China website today. Economists watch the numbers for signs of inflows or outflows of so-called hot money.

“Given the external environment, China will slow down the yuan’s appreciation,” said Rees Kam, a Hong Kong-based senior strategist at SJS Markets Ltd. “The likely collapse of an agreement among the U.S. congressional budget deficit panel would hurt risk sentiment.”

Twelve-month non-deliverable forwards fell 0.33 percent to 6.3535 per dollar as of 5:41 p.m. in Hong Kong, according to data compiled by Bloomberg. That was the biggest decline since Oct. 13. The contracts were at a 0.1 percent premium to the onshore spot rate.

The yuan weakened 0.07 percent to 6.3600 per dollar at the close in Shanghai, according to the China Foreign Exchange Trade System. It reached a 17-year high of 6.3354 per dollar on Nov. 14. In Hong Kong’s offshore market, the yuan slid 0.32 percent to 6.3770.

The People’s Bank of China set the currency’s daily rate 0.04 percent stronger at 6.3522. The yuan is allowed to trade up to 0.5 percent on either side of the fixing.

‘Basically Finished’

The currency’s appreciation is “basically finished” and it may become overvalued if it continues to strengthen, Zhang Monan, an economic researcher at the State Information Center, wrote in a commentary posted on the Economic Information Daily’s website today. A reduction in China’s trade surplus and rising overseas investment have been easing appreciation pressure, Zhang said.

The yuan rose by as much as 0.09 percent earlier after the official China Central Television reported that Premier Wen Jiabao told U.S. President Barack Obama that policy makers will move to allow more exchange-rate flexibility at a summit of Asian leaders in Bali, Indonesia on Nov. 19.

One reason the yuan didn’t strengthen significantly after Wen’s comments is that he is just reading from the script of the latest language the economic policy leadership agreed to.

Unbalanced Trade Flows

“China has been engaging to reform and increased flexibility” of its currency, Zhang Tao, director general of the international department of the People’s Bank of China, said Nov. 2. “China will continue the reform and improve the exchange-rate regime.”

Policy makers in the world’s second-largest economy pledged to adjust the nation’s growth toward domestic demand and narrow its external surplus to help address lopsided flows of trade and investment that contributed to the global financial crisis of 2008. Unbalanced trade flows have triggered calls from the U.S. and other Group of 20 nations for China to allow its currency to trade more flexibly.

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