Yuan Falls as Chinese Officials Seek to Prevent Economic Slump

The yuan fell, erasing almost all the gains made in the previous trading session, on speculation China's policy makers are keeping the currency stable to prevent the economy from slumping.

The yuan, Asia's best performer this year, declined after the U.S. dollar index, which tracks the greenback against currencies of six major trading partners, snapped a two-day loss. China's Premier Wen Jiabao pledged over the weekend more funding and fiscal support for smaller enterprises to help them weather the slowdown in the domestic and global economy.

"The yuan has been fluctuating within a narrow range recently as investors have concerns over the volatility in global markets,'' said Guo Zhaoyang, a foreign-exchange strategist at China Everbright Bank Co. in Guangzhou, a city in southern China. "People are not sure about the yuan's direction as there are uncertainties in the world and China's economies.''

The currency fell 0.07 percent to 6.8287 a dollar in Shanghai as of 10:11 a.m., according to the China Foreign Exchange Trade System. The yuan is allowed to trade by up to 0.5 percent against the dollar either side of the so-called central parity rate, which was set at 6.8303 today.

Non-deliverable forwards contracts show the yuan may depreciate 1.7 percent to 6.9450 in the next 12 months. The yuan will move between 6.7 and 7 to the dollar by the end of this year, Guo forecast.

Policy makers have limited yuan gains against the dollar to less than 0.4 percent since the end of June, after allowing it to appreciate 6.6 percent in the first half of the year.

China announced a $586 billion stimulus last week, focused on building low-rent housing, roads, railways and airports. The package also allows tax deductions for fixed assets such as machinery to stimulate investment. Farmers will also benefit from more subsidies. The economy grew 9 percent in the third quarter, the slowest pace in five years.