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Yuan Declines Most in Four Weeks After PBOC Weakens Fixing Rate

The yuan dropped the most in four weeks after the central bank set a weaker daily rate and cut banks’ reserve requirements, reflecting concern over slowing economic growth.

The People’s Bank of China lowered the reference rate by 0.14 percent to 6.3040 per dollar, the weakest level since April 20. The central bank cut lenders’ reserve requirements by 50 basis points on May 12, effective May 18, after data showed April industrial production, exports, new loans and retail sales increased less than forecast.

“This reserve-ratio cut came a bit late as the economy is already slowing more than expected,” said Tommy Ong, senior vice-president of treasury and markets at DBS Bank (Hong Kong) Ltd. “The yuan will stay weak until investors see a clear trend that China could deliver its 7.5 percent growth target.”

The yuan fell 0.17 percent, the most since April 16, to close at 6.3215 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency is allowed to trade as much as 1 percent on either side of the daily fixing. The yuan’s one-month implied volatility, a measure of exchange-rate swings used to price options, was unchanged at 1.85 percent.

Offshore Discounts

In Hong Kong’s offshore market, the yuan dropped 0.12 percent to 6.3208, the lowest level since March 30. Twelve-month non-deliverable forwards slid 0.27 percent to 6.3770, a 0.9 percent discount to the onshore spot rate, according to data compiled by Bloomberg. The discount is the largest since Jan. 2

Industrial output increased 9.3 percent in April, the least since May 2009, according to the data last week. The reading trailed the median estimate of economists surveyed by Bloomberg for a 12.2 percent increase. Overseas sales climbed 4.9 percent from a year earlier, less than the 8.5 percent gain projected in another Bloomberg survey.

Greek political leaders failed to reach agreement on forming a coalition government last week following a May 6 election, raising the risk the nation will back out of a European Union-led bailout agreement.

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