Yuan tumbles to end at bottom of band vs dollar

(rewrites with latest forwards move, official comment, analysis)

By Lu Jianxin

SHANGHAI, Dec 1 (Reuters) - The yuan posted a record one-day loss versus the dollar on Monday, hitting the bottom of its daily trading band for the first time, as dealers speculated China might shift policy and permit yuan depreciation to stimulate its slowing economy.

The Chinese currency closed at a five-month low of 6.8848 to the dollar, which traders said was the bottom of the band which China's central bank sets 0.5 percent on either side of the day's official reference rate or mid-point.

The yuan slid 0.73 percent from Friday's finish of 6.8349. It was the currency's biggest loss since its peg to the dollar was abolished in July 2005.

"There has clearly been a policy change as the central bank apparently allowed the yuan to fall its limit today without intervention," said Liu Dongliang, currency analyst at China Merchants Bank in Shenzhen.

"The logic behind the policy change is that the impact of interest rates and the economic stimulus package is too slow to reach exporters, the sector that is bearing the brunt of the economic slowdown."

During the global market turmoil of the past four months, the central bank used its mid-point system and indirect intervention when necessary to keep the yuan in a tiny range of roughly 6.82-85 against the dollar.

But traders said Monday's move appeared to indicate that China might now be willing to follow other Asian countries in engineering a moderate depreciation of its currency.

"There is strong speculation that China may have started to consider adjusting its currency policy to let the yuan fall in line with global dollar strength," said a dealer at a European bank in Shanghai.

POLICY

China's top leaders are due to meet this month to map out the country's economic and financial strategy for next year, and some traders think the meeting may discuss changes to currency policy.

Last week, China announced its biggest interest rate cut in a decade, and earlier it announced a massive fiscal stimulus plan, including tax breaks for exporters. That has left the exchange rate as the only major tool that the government has not yet used to fight the slowdown.

Data on Monday appeared to confirm that China's economic downturn was accelerating. The China Federation of Logistics and Purchasing said its purchasing managers' index (PMI), based on a survey of industrial firms across China, sank to a record low of 38.8 in November from 44.6 in October.

A central bank official, contacted by telephone, said China would continue to reform its currency policy while maintaining the "basic stability" of the yuan.

He noted that the yuan's drop had not brought it outside its trading band, and declined to make any further comment. He declined to be named under briefing rules.

FORWARDS

One-year offshore dollar/yuan non-deliverable forwards, used by many investors to bet on the Chinese currency's long-term outlook, jumped to 7.2680 bid from Friday's close of 7.0450, their biggest daily rise in over five years.

Their new level implied yuan depreciation over the next 12 months from the day's mid-point of 5.74 percent, up from 2.98 percent implied at the close on Friday. Implied 12-month depreciation was at its highest level in more than five years.

One-year dollar/yuan volatilities, which reflect demand for derivatives to hedge against the possibility of a big move by the yuan, surged as high as 14.25 percent bid from Friday's finish of 12.20 percent, climbing back towards a multi-year peak of 15.50 percent hit in late October.

Dealers said the mid-points set by the central bank during the rest of this week would be crucial in suggesting how much it was likely to allow the yuan to depreciate.

The central bank has said it wants to prevent large-scale capital outflows from China, and it is believed to want to avoid a cycle of competitive devaluations of Asian currencies. During the Asian financial crisis of 1997/98, it kept the yuan steady because of such risks.

So the market does not think the yuan will be allowed to depreciate nearly as much against the dollar as other Asian currencies such as the Indian rupee, down nearly 16 percent since July, or the South Korean won, down more than 30 percent.

Six dealers in China informally polled by Reuters on Monday said they believed any yuan depreciation would remain small for the short term at least, with the Chinese currency probably not falling below 6.90 before the end of this year.

But the yuan could depreciate nearly 3 percent further in the first half of next year, to about 7.1, if the dollar continued to rise globally and China's economy kept weakening, they said. (Reporting by Lu Jianxin; Editing by Andrew Torchia)