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Yuan Drops as PBOC Sets Weaker Fixing After China’s FDI Declines

The yuan declined after the central bank set a weaker reference rate for the currency following data yesterday showing foreign-direct investment contracted for a fifth month.

Investment fell 6.1 percent in March from a year earlier to $11.8 billion, compared with a 0.9 percent decline the previous month, the ministry of commerce reported. The People’s Bank of China set the daily fixing 0.08 percent lower at 6.2948 per dollar, even after the International Monetary Fund raised its forecast for global growth and regional equities advanced.

“I’m quite surprised to see a weaker fixing today despite the stronger markets across Asia,” said Stella Lee, president of Success Futures & Foreign Exchange Ltd. in Hong Kong. “China may want to show a wider band doesn’t mean more room for one-way appreciation bets. Investors are concerned about the magnitude of China’s economic slowdown as investment keeps falling.”

The yuan declined 0.02 percent to close at 6.3028 per dollar in Shanghai, according to the China Foreign Exchange Trade System. It fell as much as 0.12 percent earlier. One-month implied volatility for the yuan, a measure of exchange-rate swings used to price options, dropped 28 basis points, or 0.28 percentage point, to 2.2 percent.

In Hong Kong’s offshore market, the yuan weakened 0.07 percent to 6.3035. Twelve-month non-deliverable forwards traded at 6.3440, little changed from yesterday’s 6.3455, a 0.6 percent discount to the onshore spot rate.

London Yuan Trade

The Washington-based IMF said the global economy will grow 3.5 percent this year, up from a January projection of 3.3 percent, and 4.1 percent in 2013. The fund forecast China will expand 8.2 percent in 2012 compared with 8.1 percent previously.

The yuan is allowed to trade 1 percent either side of the daily fixing after the central bank increased the band from 0.5 percent this week. The move doesn’t necessarily signal a shift to a new exchange-rate framework and the band remains “narrow,” Fitch Ratings said yesterday.

Research company Bourse Consult said in a report today that London is seeking to become a hub for yuan trade and investment in an initiative backed by Bank of China Ltd., Barclays Plc, Deutsche Bank AG, HSBC Holdings Plc and Standard Chartered Plc.

Institutions in the U.K. capital currently have more than 109 billion yuan ($17.3 billion) of customer and interbank deposits in the Chinese currency and that total is “growing strongly,” according to the report.

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