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Yuan drops as policy makers check gains to aid exporters
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China's yuan closed at a two-month low yesterday on signs the People's Bank of China is keeping currency gains in check to help exporters survive the global financial crisis. Government bonds rose.

The central bank will strengthen foreign-exchange management and use interest-rate tools to stabilize market expectations, central bank Governor Zhou Xiaochuan said in a report delivered to the nation's law makers, according to the official China News Service. China will also strengthen monitoring of cross-border capital flows to prevent any adverse impact on the economy, Zhou said.

"The comments on currency mainly mean the yuan's rate will hold relatively stable versus the dollar as regulators wouldn't like to see a total reversal of its appreciation, which may trigger capital outflows," said Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp, the country's second- biggest lender. Zhou was seeking to "stabilize the market when the international environment isn't that good," he added.

The yuan declined 0.13 percent to 6.8523 per US dollar in Shanghai as of 5:30pm yesterday, the weakest close since August 20, according to the China Foreign Exchange Trade System. The rate was little changed from 6.8485 per dollar at the end of last month.

China's currency stopped gaining versus the dollar in July, after climbing 6.6 percent in the first half, as the government shifted its focus to sustaining economic growth from curbing inflation. The yuan weakened in both August and September, after strengthening every month but one in the three years after a fixed exchange rate was scrapped in July 2005.

The central bank fixed the reference rate for yuan trading at 6.8360 per dollar yesterday, little changed from 6.8357 last Friday and 6.8321 on October 10, signaling it wants to keep the exchange rate stable. The yuan, managed against a basket of currencies, is allowed to trade by up to 0.5 percent against the dollar either side of the so-called central parity rate.

Government bonds rose on speculation turmoil in global financial markets would steer investors toward less-risky assets. More than US$10 trillion of market value has been wiped off stocks worldwide this month alone.

"Investors prefer the safety of government debt even if the yields are low," said Yan Suping, a bond analyst at China Merchants Bank Co in Shenzhen. "Recent comments by policy makers were intended to give confidence to the market, which in a way reflected investors are still pessimistic about the outlook for the economy."

The steepest stocks slide in four months also helped draw investors to bonds yesterday. The CSI 300 Index, which tracks yuan-denominated shares traded in Shanghai and Shenzhen, tumbled 7.1 percent to 1,654.67, the lowest since November 2006. China's bonds climbed in each of the last four weeks, an Asian local-currency debt index by HSBC Holdings Plc said.

(Shanghai Daily October 28, 2008)

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