Yuan falls most in four months

China’s yuan dropped the most in four months as concern Europe’s debt crisis will worsen curbed demand for emerging market assets.

Failure to combat the Greek-led turmoil threatens “cascading default, bank runs and catastrophic risk,” US Treasury Secretary Timothy F Geithner warned at the meeting of the International Monetary Fund in Washington Saturday. Benchmark stock indexes slumped across Asia on Monday, sending the MSCI Asia Pacific Index to its lowest close in 16 months.

The yuan dropped 0.18 per cent to close at 6.4006 per dollar in Shanghai, extending last week’s 0.09 per cent decline, according to the China Foreign Exchange Trade System. It touched 6.4049, the weakest level since August 12. In Hong Kong’s offshore market, the currency strengthened 0.38 per cent to 6.4875, after sliding 2.1 per cent last week, Bloomberg data show.

“The onshore yuan was behind the curve compared with the offshore rate, despite the market having been in risk-off mode,” said Carlos Cheung, a foreign-exchange currency dealer at Bank of Communications Ltd in Hong Kong. “Some companies sold the yuan because they are short of dollars.”

Twelve-month non-deliverable forwards on the yuan gained 0.06 per cent to 6.4015 per dollar, almost matching the spot rate in Shanghai, according to data compiled by Bloomberg. The People Bank’s of China set its daily reference rate 0.16 per cent stronger at 6.3735, the highest level since July 2005. The yuan is allowed to trade up to 0.5 per cent on either side of the daily reference rate.

Currency Policy
The yuan is “highly relevant” to China’s international balance of payments, central bank Governor Zhou Xiaochuan said in Washington on Saturday, adding that a global economic slowdown wouldn’t affect its currency policy. The yuan may become fully convertible in five years, Li Daokui, an adviser to the People’s Bank of China, said at a forum in Washington.

China halted a three-year, 21 per cent advance in the yuan in July 2008 to help exporters weather a global recession. The currency has strengthened 6.6 per cent since the central bank allowed appreciation to resume in June 2010.