The yuan fell by the most in more than a month yesterday after China said it is drafting regulations to control cross-border payments for services to curb rising inflows of "hot money."

The yuan dropped for a second day after an official at the State Administration of Foreign Exchange, who declined to be named, said controls on international payments for consultancy or franchising fees are "relatively weak." The rules need to be strengthened to stop speculative capital inflows betting on further currency gains, he said. The yuan is the second-best performer among the 10 most-active currencies in Asia excluding the yen this year.

"The central bank will slow yuan gains this month to increase the currency's volatility and deter speculators' one-way bets, like what it did in April," Hao Shufei, a foreign-exchange trader at the Chinese unit of ABN Amro Bank NV in Shanghai, told Bloomberg News. "The dollar's strengthening against major currencies gives the central bank a good chance."

Consultation

The yuan dipped 0.15 percent to 6.8690 per US dollar as of the 5:30pm close in Shanghai, from 6.8589 late last week, according to the China Foreign Exchange Trade System. It may trade between 6.8450 and 6.8750 this month, Hao forecast.

The yuan gained 0.35 percent versus the US dollar in April, the slowest pace since March 2007, after rising 4.2 percent in the first quarter.

The currency regulator is consulting with agencies, including the commerce ministry, on details before announcing the new rules, the official added.

The yuan earlier rose after Premier Wen Jiabao said the fight against inflation will have a "preeminent" position among macroeconomic controls.

Vice Premier Wang Qishan said the country will maintain its efforts to contain inflation, the Shanghai Securities News reported yesterday.

"The yuan will rise as the central bank relies on appreciation to control imported inflation," said Liu Dongliang, a foreign-exchange analyst in Shenzhen at China Merchants Bank Co. "The authorities may raise interest rates after the Olympics, which will ease their dependence on the currency tool."

The annual inflation rate rose to 8.1 percent in the first five months of the year, from 4.8 percent for all of 2007.

(Shanghai Daily July 8, 2008)