Bloomberg News

Yuan Has Monthly Drop as Europe Debt Crisis Spurs Dollar Demand

September 30, 2011

Sept. 30 (Bloomberg) -- China’s yuan had its first monthly decline since January as concern Europe’s sovereign-debt crisis will worsen bolstered demand for dollars.

The currency hit the bottom of its trading range for a third day, while twelve-month non-deliverable forwards completed their biggest monthly decline since September 2008, when global credit markets seized up following the bankruptcy of Lehman Brothers Holdings Inc. Yuan trading volumes slumped in Shanghai as the People’s Bank of China set its strongest reference rate on record, preventing the currency from sliding to a level that would encourage more dollar sales.

“Investors are worried about the spillover effect of the euro zone on China’s economic growth,” said Kenix Lai, a senior market analyst at Bank of East Asia Ltd. in Hong Kong. “Funds are flowing into the dollar on risk aversion as the global economic outlook looks dimmer now.”

The yuan weakened 0.13 percent this month to 6.3859 per dollar as of 4:30 p.m. in Shanghai, paring its quarterly advance to 1.2 percent, according to the China Foreign Exchange Trade System. The currency gained 0.19 percent today after the People Bank’s of China set the daily reference rate 0.18 percent stronger at 6.3549. The exchange rate is only allowed to fluctuate 0.5 percent on either side of the daily fixing and the currency reached the lower end of its trading band on each of the past three days.

Trading Slump

“There’s no trade because people aren’t willing to sell the dollar or buy the yuan at the current rate, after the central bank set the reference rate stronger,” said Peng Hao, a trader at Fudian Bank Co. in Kunming, capital of the southern Yunnan province. “The offshore yuan rate has fallen a lot, while the onshore rate is slow to react.”

China Foreign Exchange Trade System recorded 11 trades before noon today, down from about 100 in the same period yesterday, according to data compiled by Bloomberg. Activity picked up in the afternoon after the currency strengthened from the lower end of its trading band. Financial markets in China will be closed next week for the National Day holiday.

In the offshore market in Hong Kong, the yuan had its worth month since trading started in July 2010. The currency slumped 0.1 percent to 6.4895 per dollar, contributing to a 2 percent loss this month, Bloomberg data show.

Twelve-month non-deliverable forwards dropped 2.2 percent this month and 0.08 percent today to 6.4235 per dollar in Hong Kong, a 0.7 percent discount to the onshore spot rate, according to data compiled by Bloomberg.

Global Outlook

European leaders have struggled to contain the region’s worsening debt crisis amid growing concern Greece will default. The International Monetary Fund cut China’s 2012 growth forecast to 9 percent from 9.5 percent on Sept. 20 on credit tightening and faltering demand for its exports.

About three-quarters of 1,031 investors said the euro-area economy will fall into recession during the next 12 months, according to a Bloomberg quarterly Global Poll published on Sept. 29. China shipped 19.8 percent of its exports to the European Union in August.

“When conditions in the global economy are turbulent, we believe Beijing’s priority is to prevent the turbulence from entering the domestic economy,” Tim Condon, Singapore-based head of Asian research at ING Groep NV, wrote in a note today. “The last time this happened was during the Lehman panic in September 2008. The authorities re-pegged the yuan to the dollar, which is what we think they will do again if the turmoil persists.”

U.S. Calls

Lael Brainard, U.S. undersecretary for international affairs, will travel to Beijing tomorrow for meetings with Chinese officials, the U.S. Treasury said yesterday. Brainard will reiterate that while the yuan “has appreciated 10 percent adjusted for inflation since June 2010, the currency remains substantially undervalued, and more progress is needed,” the Treasury said.

The Obama administration views China’s currency as “substantially undervalued” and is reviewing legislation that aims to penalize the world’s second- largest economy, White House press secretary Jay Carney said on Sept. 28.

“The record fixing rate today is partly answering these political calls for yuan appreciation,” Bank of East Asia’s Lai said. “It’s difficult for China to satisfy these yuan-gain expectations as the government still prefers a gradual, controlled approach.”

-- With assistance from Judy Chen in Shanghai, David Yong in Singapore and Yumi Teso in Bangkok. Editors: Andrew Janes, James Regan

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

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


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