Yuan Snaps Four-Day Advance as Trade Data Fuels Growth Concerns

The yuan dropped for the first time in five days after China’s June export growth missed estimates, prompting concern about the nation’s economic recovery.

Overseas sales rose 7.2 percent from a year earlier, official data showed today, compared with the 10.4 percent median estimate in a Bloomberg News survey of economists. Imports rose 5.5 percent, leaving a $31.6 billion trade surplus. Barclays Plc said there’s less room for the yuan to appreciate in the near term as the recovery appears fragile.

“The downside surprise in June export growth suggests a softer-than-expected pickup in China’s external demand, while the uptick in the import growth points to a modest recovery in domestic demand,” said Jian Chang, a Hong Kong-based economist at Barclays. “Given weak trade growth, the yuan will be less likely to return to an appreciation trend.”

The yuan fell 0.05 percent to close at 6.2028 per dollar in Shanghai, China Foreign Exchange Trade System prices show. The currency halted a four-day gain of 0.21 percent ahead of the two-day U.S.-China Strategic and Economic Dialogue that ended in Beijing today. It has dropped 2.4 percent this year in Asia’s worst performance.

The central bank raised the yuan’s daily fixing by 0.2 percent to 6.1443 per dollar today. The spot rate traded 0.9 percent weaker than the fixing, within the 2 percent limit. In Hong Kong’s offshore market, the yuan slipped 0.04 percent to 6.2027, after touching three-month high of 6.1930, according to data compiled by Bloomberg.

U.S. Pressure

U.S. Treasury Secretary Jacob J. Lew said yesterday that greater flexibility for the yuan would help raise household purchasing power. The People’s Bank of China will reduce its intervention in the yuan’s exchange rate “when conditions are ready,” Governor Zhou Xiaochuan said in Beijing today, adding that “after the global financial crisis, international markets are not very calm with frequent problems.”

The comment builds on Finance Minister Lou Jiwei’s remarks yesterday that China can’t stop intervention yet because economic growth is too weak and capital flows aren’t steady enough.

“There’s political pressure for yuan gains given the U.S.- China talks.” said Banny Lam, Hong Kong-based co-head of research at Agricultural Bank of China International Securities Ltd. “China is likely to report another record foreign-exchange reserves, which means the PBOC will allow more appreciation as today’s fixing suggests.”

Foreign Reserves

The government will report its end-June foreign reserves as soon as tomorrow and the median estimate in a Bloomberg survey is for an advance to $3.98 trillion. China will also release loans and money supply data in the coming week.

Twelve-month non-deliverable forwards declined 0.05 percent to 6.2530, a 0.9 percent discount to the onshore spot rate. One-month implied volatility in the onshore yuan, a gauge of expected moves in the exchange rate used to price options, fell one basis point to 1.64 percent today.

The Hong Kong Monetary Authority this week injected a total of HK$6.859 billion ($885 million) into the banking system to prevent the city’s currency from rising beyond its permitted trading band. The Hong Kong dollar traded at HK$7.75 versus the greenback, at the strong end of its HK$7.75 to HK$7.85 range.

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