China's yuan closed lower against the dollar on Tuesday as the central bank set a low reference rate to slow its pace of appreciation amid a four-day visit by US Treasury Secretary Henry Paulson and after Beijing's latest monetary tightening.
Paulson's visit coincides with a drive by US lawmakers, frustrated by America's record trade deficit with China, to press Beijing upon pain of sanctions to allow open markets to set the yuan's value.
The People's Bank of China announced on Monday that it would raise the level of deposits that lenders must hold in reserve from August 15, the ninth rise in 13 months and the latest step in a campaign to keep the economy from overheating.
The decision on further tightening appeared to offer fresh ammunition to those who have urged Beijing to allow the yuan to appreciate at a faster pace to help cool the economy.
The yuan closed at 7.5724 to the dollar, down from Monday's close at 7.5674 but higher than the central bank's reference rate of 7.5737, set before the start of trade. Tuesday's mid-point, while sharply below Monday's close, rose from Monday's mid-point of 7.5824 - the lowest in almost three weeks.
"It's always the case that the central bank will tighten its grip on the pace of the yuan's gains when speculation mounts on faster appreciation," said a dealer at a Chinese commercial bank.
Tuesday's low reference rate also came after the offshore non-deliverable forwards pointed to rising expectations of yuan appreciation, while the spread between US and Chinese money market rates hit multi-year lows - developments that may spur a resurgence of speculative money flows into China. Chinese Vice Premier Wu Yi on Tuesday fended off US pressure for a faster rise in the yuan by telling Paulson that China was still poor and posed no threat to anyone.
Her comments went to the heart of Beijing's refusal to permit a more rapid rise in the yuan: officials fear a stronger currency could not only destroy millions of export-orientated jobs but would also make it tough for peasants who make up over 60 percent of its population to compete against cheaper food imports. Tuesday's low mid-point appeared to have put a damper on overseas speculation over a faster yuan rise.
One-year non-deliverable forwards (NDFs) quoted the yuan at 7.1470/7.1520, indicating appreciation of 5.90 to 5.97 percent in a year's time from Tuesday's mid-point, down from Monday's 6.11 to 6.17 percent. The NDFs' implied appreciation forecast on Monday, up from around 4.5 percent in mid-July, was the highest since late May and not far from 6.6 percent hit in late March - the highest implied forecast since Beijing revalued the Chinese currency and depegged it from the dollar in July 2005.
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