Yuan Declines Before Paulson Visit as China Supports Economy
China’s yuan fell by the most in seven weeks, three days before U.S. Treasury Secretary Henry Paulson visits Beijing for trade talks, on speculation the central bank wants to weaken the currency to spur the economy.
The People’s Bank of China set its daily reference rate at the weakest level since August, after resisting pressure for the currency to appreciate since the end of July. Two reports showed China’s manufacturing contracted by a record last month as recessions in the U.S., Europe and Japan curbed demand for Chinese products.
China’s policy makers have shifted focus from stemming inflation to sustaining growth after the economy expanded at its weakest pace since 2003 in the third quarter. The yuan has gained 0.4 percent against the dollar since the two governments last held trade talks in mid June, after it advanced 6.6 percent in the first half of 2008.
“Today’s reference rate is totally unexpected,” said Yang Lindong, a foreign-exchange trader at Shenzhen Development Bank Co. in Shenzhen. “The central bank may want to test the market’s response to the possibility of a weaker yuan, but most likely it will keep the currency stable till the end of this year.”
The yuan slid 0.3 percent to 6.8570 a dollar, the weakest since Oct. 27, before trading at 6.8563 as of 2:24 p.m. in Shanghai, from 6.8349 late last week, according to the China Foreign Exchange Trade System. Today’s drop is the biggest since Oct. 10.
The central bank fixed the reference rate for yuan trading at 6.8505 today, the lowest since Aug. 21. The currency is allowed to trade by up to 0.5 percent against the dollar either side of the reference rate, which has stayed between 6.8240 and 6.8369 in October and November.
Paulson Talks
The fifth round of the U.S.-China Strategic Economic Dialogue will be in Beijing on Dec. 4 and 5 before President- elect Barack Obama’s inauguration next month. The previous round was in Annapolis, Maryland in mid-June. Obama on Oct. 24 called for an end to manipulation of the yuan.
“Paulson may call for more yuan gains, but certainly China will determine its exchange-rate policy based on economic fundamentals,” said Liu Dongliang, a Shenzhen-based foreign- exchange analyst at China Merchants Bank Co., the country’s sixth largest lender. “As the economy may deteriorate, risks of depreciation are piling up.”
The yuan has appreciated 21 percent since a peg against the dollar was scrapped in July 2005, making Chinese shipments less attractive and eroding exporters’ profits. Two-thirds of China’s small toy exporters shut down in the first nine months of this year, the customs bureau said in a report on Nov. 24.
Tags: brokers, central-bank, China Investment, economy, inflation, reserve-ratioPages: 1 2
