Yuan Declines on Speculation China Seeks to Deter Speculators

China's yuan fell, slipping from the strongest since it scrapped a peg to the dollar in 2005, on speculation the central bank is seeking to deter investors betting on further gains.

The People's Bank of China set a weaker reference rate for daily trading today after last week saying the flexibility of the currency has increased as companies adjust to "market changes." The currency has risen 0.4 percent so far this year as central bank Governor Zhou Xiaochuan yesterday said the trade surplus and faster inflation are driving the yuan's appreciation.

"The yuan's rate can't always go in one direction," said Li Huiyong, an economist at Shenyin Wanguo Research and Consulting Co. in Shanghai. "The central bank's daily reference rate needs to be fixed at different levels to help avoid one-way bet."

The yuan fell 0.07 percent to 7.2740 per dollar as of 12:07 p.m. in Shanghai, according to the China Foreign Exchange Trade System. The currency touched 7.2630 yesterday, the strongest since the peg was abandoned.

China's trade surplus, which surged 52 percent in the 11 months through November to $238.1 billion, has driven foreign- exchange reserves to a record $1.46 trillion. The nation's inflation accelerated to an 11-year high of 6.9 percent in November.

In the nation's interbank bond market, the central bank sold 5 billion yuan ($687 million) of one-year bills today at a yield of 4.06 percent to drain excess cash from the financial system.

'One Trillion Yuan'

"This sale is a large one compared with other open-market bills sales in the past year," said Qu Qing, a fixed-income analyst at Shenyin Wanguo Research & Consulting Co. in Shanghai. "More than one trillion yuan of cash will return to market as short-term PBOC bills mature this month. The central bank needs to sell new bills to absorb the excess cash."

The central bank drained another 194 billion yuan of cash by selling bills with buy-back agreements due in seven days to three months.

The yield on the treasury bills due in September 2008 held at 3.65 percent, according to the China Interbank Bond Market. The 2.95 percent security traded at 99.51 per 100 yuan face amount.