Yuan forwards had their biggest weekly drop in four months on speculation that China will prevent currency gains as part of its efforts to help its domestic economy, which the cabinet said must prepare for "long-term difficulties".

Twelve-month non-deliverable forwards (NDFs) - offshore yuan trading where settlement is made in US dollars - fell for a third week as a rally in the US currency prompted traders to pare bets on how far the yuan will strengthen.

The Dollar Index, which tracks the greenback against the currencies of six trading partners, gained 1.5 percent in that period, reflecting the sentiment that the foundations for an economic recovery in China aren't yet solid. It is a view announced by China's State Council after a June 17 meeting chaired by Premier Wen Jiabao.

"It's impossible for China to have a V-shaped recovery even though the economy is stabilizing," said Liu Xin, an analyst at the Hong Kong branch of Bank of Communications Ltd, China's fifth-biggest lender. "The yuan will probably stay little changed until the second half of next year, and the NDFs may fall to the same level as the spot rate."

Yuan 12-month forwards traded at 6.7620 per dollar early last week in Shanghai, down from 6.7590 on June 19, according to data compiled by Bloomberg. They declined 0.55 percent the week before last week, the most since the five days ending on Feb 20.

Forwards are agreements in which assets are bought and sold at current prices for future delivery.

China has kept the yuan little changed since July 2008, following a 21 percent gain since a peg to the dollar ended in 2005, to help exporters survive the global recession and shore up the economy. A customs bureau report showed last week that exports slumped 26.4 percent in May, the worst performance since Bloomberg started tracking the data in January 1995.

Government bonds declined early this month on speculation local banks trimmed their holdings to free up cash for lending.

Bloomberg News

(China Daily 06/29/2009 page2)