Yuan Falls as China Tightens Control on Foreign Capital Inflows

The yuan fell for a third day this week after China approved new rules to curb illegal inflows of capital, fueling speculation the controls will damp demand for the local currency.

The rules give regulators greater authority to investigate currency payments, the State Council, the country's cabinet, said in a statement yesterday. The central bank has kept the yuan almost unchanged since the start of this quarter, following a 2.3 percent gain in the three months through June.

"The tighter rules will stem inflows of hot money betting on faster yuan gains," said Zhuang Zhiqiang, a foreign-exchange trader at Xiamen International Bank Co. "There will be less demand for conversions from the dollar to the yuan, which will lead to a sharp decline in the pace of its appreciation.''

The yuan fell 0.1 percent to 6.8552 versus the dollar as of 10:07 a.m. in Shanghai, from 6.8482 yesterday, according to the China Foreign Exchange Trade System.

"Previous regulations were focused on controls of capital outflows,"the State Administration of Foreign Exchange, China's state currency regulator, said about the new rules in a statement on its Web site yesterday."Essential changes have happened in China's international payments and China has shifted from a shortage of foreign exchange to excessive growth in currency reserves."

The People's Bank of China fixed the reference rate for yuan trading weaker for a seventh day. The yuan is allowed to trade by up to 0.5 percent against the dollar on either side of the rate, which was set at 6.8555 today.