Yuan Has Worst Quarter Since Peg Ends as Europe Hurts Growth

The yuan had its biggest quarterly decline since a dollar peg ended in 2005 as Europe’s crisis hurt demand for Chinese exports, slowing expansion in the world’s second-largest economy.

The People’s Bank of China lowered the currency’s daily reference rate by 0.48 percent this quarter, while the Dollar Index strengthened 4 percent as investors favored safer assets. Slowing trade to the U.S. and Europe has “impacted” the yuan, Zhang Jianhua, director-general of the People’s Bank of China’s research bureau, said at a forum in Shanghai yesterday.

“China’s economic data is unlikely to be impressive with lingering problems in Europe,” said Stella Lee, president of Success Futures & Foreign Exchange Ltd. in Hong Kong. “The government is trying to bolster domestic consumption but that takes time. The yuan will only rebound in the fourth quarter if the economy regains strong growth momentum.”

The yuan weakened 0.88 percent this quarter to 6.3541 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency gained 0.05 percent today as Europe’s leaders agreed to ease repayment conditions for loans to Spanish banks.

The central bank set its daily fixing 0.09 percent lower at 6.3249 per dollar, still 0.5 percent stronger than yesterday’s close in Shanghai. The currency is allowed to trade as much as 1 percent on either side of the fixing since April, after being kept at 0.5 percent for five years.

Profits of industrial companies in China fell 5.3 percent in May from a year earlier to 390.9 billion yuan ($61 billion), the National Bureau of Statistics said today. That compares with a 2.2 percent decline in April and a 4.5 percent gain in March.

Hu’s Visit

Economic growth is forecast to slow to a three-year low of 7.9 percent in the second quarter, before accelerating to 8.3 percent in the three months through September, according to median estimates in Bloomberg surveys.

President Hu Jintao will visit Hong Kong today for three days for the 15th anniversary of the city’s return to Chinese rule. Hong Kong’s biggest banks are calling for an end to the ban on non-residents buying yuan in the city after deposits fell to the lowest level in 11 months in April. Hu may announce measures to boost the usage of yuan in offshore markets, and the Hong Kong Monetary Authority is scheduled to give yuan deposit figures for May today.

In Hong Kong’s offshore market, the yuan declined 0.77 percent this quarter to 6.3610 per dollar. That was the biggest quarterly drop in Bloomberg data going back to August 2010, the month after the yuan was allowed to start trading in the city. Twelve-month non-deliverable forwards advanced 0.04 percent today to 6.4255, limiting this quarter’s loss to 1.3 percent. The contracts were at 0.96 percent discount to the onshore rate.

One-month implied volatility, a measure of exchange-rate swings used to price options, was unchanged at 1.8 percent today, down from 2.2 percent at the end of last month.

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