The yuan will weaken ahead of Chinese President Hu Jintao’s visit to Washington next month, trading in currency forwards shows, antagonizing U.S. senators who say they may back trade sanctions unless there’s appreciation. The currency fell 0.39 percent to 6.6745 per dollar since Dec. 6, when 30 senators sent a letter to Chinese Vice Premier Wang Qishan calling for the yuan to “appreciate meaningfully” before Hu’s trip. Forwards traders are betting on a further 0.05 percent decline in the coming month. U.S. President Barack Obama has met for talks with Chinese leaders twice since a two-year currency peg was relaxed in June. Yuan gains of 0.6 percent or more were recorded in the prior month each time. “It’s impossible for China to yield to the calls,” said Lu Zhengwei, an economist at Industrial Bank Co. in Shanghai. “Officials seem to consider the pace of appreciation since June the maximum that the economy can withstand. Faster gains would create too many difficulties for exporters.” The yuan is the best performer among the so-called BRIC nations’ currencies in the past decade and commerce ministry spokesman Yao Jian said this month that U.S. export controls are a key cause of the trade imbalance between the two countries. U.S. data show the trade gap with China totaled $227 billion in the first 10 months of this year, more than the deficits with the next seven-largest trading partners combined. U.S. lawmakers including Senator Charles Schumer, a New York Democrat, say a weak yuan is one reason for the trade gap and have pressed China to let its currency rise. The House of Representatives passed legislation in September letting U.S. companies petition for duties on Chinese imports to compensate for the effect of a weak yuan. Best of BRICs Chinese Commerce Minister Chen Deming said the nation is committed to “balancing” foreign trade by stabilizing exports and boosting imports over the next five years, the China Daily newspaper reported Dec. 17. Exports rose 33 percent from a year earlier in the last 11 months, while imports climbed 40 percent, customs bureau statistics show. The yuan has strengthened 24 percent against the dollar in the past decade, outperforming gains of 14 percent in the Brazilian real, 2.9 percent in India’s rupee and a 9.1 percent slide in the Russian ruble, according to data compiled by Bloomberg. The yuan, real and rupee all appreciated less than 3 percent this year, while the ruble weakened 2.7 percent. Yuan Falls China’s currency dropped 0.28 percent yesterday to 6.6745, its biggest loss in six weeks, as concern some European nations will struggle to pay their debts bolstered demand for the greenback. The U.S. Dollar Index, a gauge of the currency’s strength, hit its highest level in more than two weeks. The yield on the 3.29 percent government note due in September 2020 fell 2 basis points, or 0.02 percentage point, yesterday to 3.79 percent, according to prices from the National Interbank Funding Center. Credit-default swaps tied to China’s sovereign debt for five years rose 4 basis points to 72, according to CMA prices. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. International Monetary Fund Managing Director Dominique Strauss-Kahn said on Dec. 17 that calls for an immediate revaluation of the yuan are “probably wrong.” A sudden move would be “disturbing” to the Chinese and world economy, he said. China Stocks The benchmark Shanghai Composite Index of shares has dropped 5 percent since the central bank raised its benchmark interest rates on Oct. 19 for the first time since 2007, seeking to tame the fastest inflation in two years. Policy makers boosted banks’ reserve-requirement ratios for the sixth time in 2010 this month, sparking a cash squeeze that last week drove the benchmark money-market rate to a two-year high of 3.72 percent. The seven-day repurchase rate fell 18 basis points, or 0.18 percentage point, to 3.54 percent yesterday and the 10-year bond yield slid 2 basis points to 3.84 percent. The People’s Bank of China scrapped a two-year dollar peg on June 19 and allowed the yuan to rise 2.3 percent, a pace of gains that U.S. Ambassador to China Jon Huntsman said on Dec. 18 is “painfully slow.” Obama said Nov. 12 in Seoul, a day after his last talks with Hu, that the yuan was “undervalued” and he expects “progress on this issue.” The yuan appreciated 0.6 percent in the month before that meeting, which was at the Group of 20 summit in South Korea’s capital. There was a 1.4 percent advance in the month before Obama discussed currency policy with Premier Wen Jiabao in New York on Sept. 23. ‘Important Events’ “Judging from what has happened to the yuan ahead of certain important events, I think there may be some obvious appreciation before the state visit next month,” said Zhang Ming, Beijing-based deputy chief of the International Finance Research Office of the state-backed Chinese Academy of Social Sciences. “But that wouldn’t be a wise strategy because speculators would take advantage of a regular pattern.” The yuan may rise 5 percent to 6 percent next year against the dollar because the government needs to protect exporters’ interests while seeking to contain imported inflation, said CASS’s Zhang. Industrial Bank’s Lu forecast similar gains and the median forecast of 19 analysts surveyed by Bloomberg is for a 6.3 percent advance to 6.28. Forwards Non-deliverable forwards reflect bets for 2 percent appreciation to 6.5455 per dollar next year, less than the 2.9 percent gain projected when Obama and Hu met in Seoul. Forwards are agreements to buy and sell assets at current prices for delivery at a specified date. Non-deliverable contracts are settled in dollars because the yuan isn’t fully convertible. Exchange rates are likely to be overshadowed by the risk of conflict between North and South Korea during next month’s talks between Hu and Obama, said Sergey Dergachev, who helps manage the equivalent of $8.5 billion in emerging-market debt at Union Investment in Frankfurt. South Korea’s defense ministry said a live-firing drill yesterday on Yeonpyeong Island that drew threats of retaliation from the North was completed without incident. Artillery positions on the island, close to a disputed sea border, were shelled following a similar exercise last month. “Hu’s visit to the U.S. will be diplomatically important, but issues surrounding the Korean peninsula are more acute” than currency matters, said Sergey Dergachev, who helps manage the equivalent of $8.5 billion in emerging-market debt at Union Investment in Frankfurt. “I expect in the next one month no real changes in the yuan’s exchange rate.” --Judy Chen. Editors: James Regan, Sandy Hendry To contact Bloomberg News staff for this story: Judy Chen in Shanghai at +86-21-6104-3043 or xchen45@bloomberg.net. To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.

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