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Yuan Drops as PBOC Cuts Reference Rate by Most Since July 2012

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March 10 (Bloomberg) -- China’s yuan fell after the central bank cut the currency’s fixing by the most since July 2012 and the nation’s exports unexpectedly declined last month.

The People’s Bank of China lowered the daily reference rate by 0.18 percent to 6.1312 per dollar today, the weakest level since Dec. 3. Overseas shipments fell 18.1 percent in February from a year earlier, the biggest drop since 2009, customs data showed March 8. That compares with the median forecast for a 7.5 percent increase in a Bloomberg News survey. The figures may have been distorted by the Lunar New Year holiday and over-invoicing a year earlier, Tim Condon, Singapore-based head of Asia research at ING Groep NV, wrote in a note today.

The cut in the yuan fixing “is significant, coming on the heels of poor trade data, and suggests a possible policy push to weaken the yuan to help exporters,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “This would mean rising risks to more downside.”

The yuan dropped 0.17 percent to close at 6.1385 per dollar in Shanghai, having earlier lost as much as 0.51 percent, according to China Foreign Exchange Trade System prices. The currency was 0.1 percent weaker than the PBOC fixing, within the maximum allowed divergence of 1 percent.

The yuan’s movements aren’t as volatile as those of other developing-nation currencies and expanding two-way movement in the exchange rate is “definitely’ good for market development, PBOC Deputy Governor Yi Gang said in Beijing on March 7.

Slow Recovery

Imports into the world’s second-largest economy rose 10.1 percent in February from a year earlier, more than the 7.6 percent projected in a Bloomberg survey. That left a trade deficit of $23 billion, the biggest in two years, according to customs data. Consumer prices climbed 2 percent, the least in 13 months, data showed yesterday.

The yuan has weakened 1.4 percent against the greenback this year, the third-worst performance among Asia’s 11 most-traded currencies, according to data compiled by Bloomberg. It is still up 35 percent since a dollar peg was removed in July 2005, the best performance in emerging markets.

The recent yuan decline is ‘‘a result of deliberate government control” to ward off one-way bets on gains, Wang Tao, UBS AG economist in Hong Kong said in a conference call with journalists today. The currency won’t appreciate or depreciate significantly this year, she forecast.

“We still expect China’s exports to strengthen through 2014, on the back of reviving U.S. and European demand,” Wang said in a note published earlier today. “However, given the yuan’s persistent appreciation against the currencies of China’s key trading partners and major competitors, China’s export recovery may not be as strong as usual.”

Onshore Default

China’s onshore bond market had its first default last week, when Shanghai Chaori Solar Energy Science & Technology Co. failed to pay all of an 89.8 million yuan ($14.7 million) interest payment due on its March 2017 bonds.

“The yuan gains have hurt China’s export competitiveness,” said Stella Lee, president of Success Wealth Management Ltd. in Hong Kong. “Chaori’s default is a test on the domestic market as the government did not bail out the company. It’ll weigh on sentiment toward Chinese investment in the near term.”

In Hong Kong’s offshore trading, the yuan fell 0.31 percent to 6.1290 per dollar, data compiled by Bloomberg show. Twelve-month non-deliverable forwards dropped 0.47 percent to 6.1760, a 0.6 percent discount to the Shanghai spot rate.

One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, jumped 22 basis points, or 0.22 percentage point, to 1.95 percent, according to data compiled by Bloomberg. A similar gauge for the offshore spot rate climbed 22 basis points to 3.44 percent.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net Robin Ganguly