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Yuan Forwards Decline for Second Day on Europe Debt Concerns

Yuan forwards fell for a second day as political shifts in Europe fueled concern the region’s debt crisis will worsen.

Dutch Prime Minister Mark Rutte offered his cabinet’s resignation yesterday amid a revolt against spending cuts, while French President Nicolas Sarkozy lost the first round of his re-election bid. An initial report yesterday showed China’s manufacturing may contract for a sixth month in April. The PBOC weakened the reference rate 0.05 percent to 6.3003 per dollar.

“Investors are back to risk-aversion mode as political uncertainties in Europe could overshadow efforts spent on resolving the debt crisis,” said Kenix Lai, a Hong Kong-based currency analyst at Bank of East Asia Ltd. “That’s negative for the yuan because Europe is China’s largest trading partner.”

Twelve-month non-deliverable forwards dropped 0.05 percent to 6.3481 per dollar as of 4:42 p.m. in Hong Kong, a 0.6 percent discount to the onshore spot rate, according to data compiled by Bloomberg. The contracts fell as much as 0.2 percent earlier.

The yuan rose 0.02 percent to close at 6.3073 in Shanghai, halting a four-day losing streak, according to the China Foreign Exchange Trade System. The currency is allowed to trade 1 percent on either side of the daily fixing and Lai said it may slip to 6.34 within a month. In Hong Kong’s offshore market, the yuan traded at 6.3075, from yesterday’s close of 6.3080.

One-month implied volatility for the currency, a measure of exchange-rate swings used to price options, was unchanged at 2.1 percent.

Chinese government corruption must be tackled for the yuan to become a global currency, independent economist Andy Xie said at an event in Hong Kong today. If China opened its capital account now, money could flee, said Xie, a former Morgan Stanley chief Asia-Pacific economist.

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