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Yuan Hits Five-Week Low on Speculation Inflation Will Moderate

Nov. 28 (Bloomberg) -- The yuan declined, touching a five-week low, on speculation China will slow the pace of appreciation as inflation cools.

Increases in consumer prices are expected to moderate in the last two months of the year, Shanghai Securities News reported today, citing Yu Bin, a researcher from the State Council’s Development Research Center. The yuan may be “near its equilibrium” following a decline in the nation’s foreign-exchange reserves, Li Yang, a former central bank adviser, said on Nov. 26.

“There is less need for China to strengthen the yuan to lower import prices as inflation is easing,” said Banny Lam, a Hong Kong-based economist at CCB International Securities Ltd., a unit of China’s second-largest lender. “The worsening economic outlook may also steer officials toward protecting exports.”

The yuan fell 0.14 percent to close at 6.3841 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency touched 6.3871 earlier, the weakest level since Oct. 21.

The People’s Bank of China weakened its daily reference rate 0.05 percent to 6.3585 per dollar today, the lowest level since Oct. 21. The currency is allowed to trade up to 0.5 percent on either side of the daily reference rate.

In Hong Kong’s offshore market, the yuan slipped 0.03 percent to 6.40 per dollar. Twelve-month non-deliverable forwards retreated 0.11 percent to 6.4163, a 0.5 percent discount to the onshore spot rate.

China’s foreign-exchange reserves were $3.2 trillion at the end of September, a $61 billion decrease from a month earlier and the first decline since May 2010, according to official data. The currency may see more “two-way fluctuations” compared with the past few years, according to Li.

Asia’s largest economy will expand 8.4 percent next year, compared with a previous estimate of 8.7 percent, Morgan Stanley said today, citing a worsening external environment and weakness in the domestic housing market. Inflation next year will be 3.4 percent, compared with an earlier forecast of 3.6 percent, the bank said in an e-mailed report today.

-- Editors: Ven Ram, Sandy Hendry

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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