China's central bank on Wednesday set the yuan's reference central parity rate at 6.6912 against the US dollar, the lowest level since Sept 30. [China Daily]

The yuan fell to a three-week low against the greenback on Wednesday, a drop analysts said will help the country's exporters if it continues.

The central bank set the yuan's reference central parity rate at 6.6912 against the US dollar, the lowest level since Sept 30 after the Chinese currency hit a record high of 6.6497 per dollar on Oct 15.

The move came ahead of a visit by US Secretary of State Hillary Clinton, who on Wednesday started a two-week trip to a number of Asia-Pacific countries including Vietnam, China, South Korea and Australia.

Clinton will meet Chinese State Councilor Dai Bingguo on Hainan island during the weekend. Key issues for the Sino-US relationship, such as the planned visit by President Hu Jintao to the United States early next year and the yuan's exchange rate, are expected to stay high on their agenda.

China scrapped the dollar peg in mid-June and accelerated the pace of yuan appreciation since September, amid rising foreign pressure for a stronger Chinese currency. The yuan strengthened 2.3 percent between Sept 1 and Oct 22, causing a higher inflow of speculative capital betting on further yuan appreciation and increasing the difficulties faced by exporters, analysts said.

"Wednesday's weaker performance of the yuan reflected the central bank's earlier tone of maintaining two-way movements," said Li Wei, economist at Standard Chartered Bank.

China's foreign exchange reserves rose US$194 billion in the third quarter, far exceeding the total amount of trade surplus and foreign direct investment made during the same period.

The gap provided fresh evidence that more speculative capital is flowing into China, analysts said.

"The weakening of the yuan will give more leeway for China to deal with a possible new wave of external pressure for faster yuan appreciation, which is likely to come right before a slew of political events in the US in November and the Seoul G20 Summit," Li said.

The US mid-term congressional election will be held on Nov 2. The US Senate will also vote on a House-approved bill that will further push China to allow its currency to rise faster in November.

China's foreign trade growth is also likely to close at zero or even fall into negative territory at the end of the year. A weaker yuan will prevent exports from further deteriorating, Li said.

Li Youhuan, economist at the Guangdong Provincial Academy of Social Sciences, said many exporters in Guangdong province have felt the pain of a rising yuan as it is eating into their profits substantially.

"Exporters now fear receiving new orders, as they are uncertain about the prospects of yuan appreciation and the ensuing rising costs," Li said.

China's 2010 trade surplus is likely to shrink to about US$100 billion in 2010 from about US$190 billion a year ago, according to the Ministry of Commerce. The country's export exceeded imports by $17 billion in September, the smallest monthly surplus in five months, bringing this year's total trade balance to US$121 billion.

China's foreign exchange regulator said on Wednesday it is also implementing new rules for import payments. The plan includes "strict control measures" for some enterprises and payments, and moves to stop irregular capital flows, according to the State Administration of Foreign Exchange.

(China Daily October 28, 2010)