THE yuan fell to one-month low this week after Chinese Premier Wen Jiabao said that there would be more swings in the currency, cooling appetite for dim sum bonds.

Offshore forwards indicate traders are paring bets on appreciation as official data showed the central bank intervened less to curb gains. Yuan-denominated bond yields in Hong Kong are rising as Baosteel Group Corp prepares to sell the first debt by a Chinese mainland company in the market. The average yield on dim sum bonds rose 32 basis points to 5.67 percent in November, Bank of China Ltd data show.

While United States lawmakers are pushing for a stronger yuan, Wen told President Barack Obama in Bali on Saturday that increased flexibility may mean declines as well as gains and highlighted the move in forwards. Ten-year sovereign dim sum debt yielded 2.58 percent in Hong Kong on Tuesday, 100 basis points less than similar-maturity debt trading in Shanghai and 630 below benchmark bonds in India.

"There's less conviction on the Chinese yuan appreciation story," said Ee Leen Yueh, Singapore-based money manager at Aberdeen Asset Management Plc, which oversaw US$288 billion globally as of August 30. "Baosteel still has to pay a higher yield compared to where the market was six months ago." Aberdeen holds dim sum bonds, she said.

The yuan rose 0.07 percent to 6.3562 per dollar yesterday in Shanghai, halting a four-day decline, according to the China Foreign Exchange Trade System. Twelve-month non-deliverable forwards added 0.02 percent to 6.3685 in Hong Kong, a 0.2 percent discount to the onshore spot rate, according to data compiled by Bloomberg News.

Net outflows

Financial institutions including the central bank sold a net 24.9 billion yuan (US$3.9 billion) of foreign currency in October, following purchases of 247.3 billion yuan in September, according to a statement on the People's Bank of China's website on November 21. Economists watch the numbers for signs of inflows or outflows of so-called hot money.

Global investors, whose access to financial markets on Chinese mainland is restricted, were willing to accept lower yields as the price for obtaining assets in yuan. The spread between the yield on the government's 2.36 percent dim sum bond due August 2021 and similar-maturity debt onshore has narrowed from as wide as 185 basis points on August 29, data compiled by Bloomberg News showed. The yield on the 3.93 percent government bond due August 2021 dropped two basis points in Shanghai on Tuesday to 3.615 percent.

"Greater two-way yuan risk means less offshore yuan deposits and higher yields on dim sum bonds, which would go some way toward normalizing the onshore and offshore bond markets," said Tim Condon, the Singapore-based head of Asian research for ING Groep NV. "Baosteel is interesting. Lower yuan appreciation will mean the bonds have a higher coupon."

'Weakening expectations'

The yuan has traded in Hong Kong at a discount to the rate on the mainland since September as Europe's debt crisis threatens exports. The offshore yuan fell 0.05 percent to 6.3785 per dollar yesterday.

"There won't be a reverse in the demand for dim sum bonds but weakening expectation for yuan gains would mean that investors may ask for bigger returns from the interest-rate side," said Lu Zhengwei, chief economist at Industrial Bank Co in Shanghai.

Baosteel said there has been strong demand for the sale that could raise as much as 6.5 billion yuan. Standard & Poor's has assigned an A issue rating to the planned debt.

"We've got very good feedback from investors," Zhou Zhuping, vice president of Shanghai-based Baosteel, said in a phone interview from Singapore after meetings with investors on Tuesday.

Chinese officials are seeking to sustain the expansion of the world's second-biggest economy as the real-estate market cools after a clampdown on speculation. The economy grew 9.1 percent last quarter from a year ago, the least since 2009.

A "tipping point" in the housing industry will spill over to damp demand for steel and other construction materials, Zhang Zhiwei, a Hong Kong-based economist at Nomura Holdings Inc, said on November 21. The risk of economic growth falling to under 8 percent in the first quarter is rising, Zhang said.

Export growth will sink to 5 percent next year from about 19.5 percent for 2011, according to Banny Lam, an economist at CCB International Securities Ltd in Hong Kong, a unit of China Construction Bank.

China's manufacturing may contract this month by the most in almost three years, a preliminary purchasing managers' index showed. The reading of 48 reported by HSBC Holdings Plc and Markit Economics yesterday compared with a final number of 51 last month. A number below 50 indicates a contraction.

Baosteel may delay its sale "given that the conditions right now are challenging," said Atul Gharde, a Hong Kong-based analyst at SJS Markets Ltd, a financial services company that specializes in fixed-income securities. Should the sale go ahead, the company's status as a "top state-owned entity" will bolster demand, he said.

Growth of yuan deposits in Hong Kong slowed last quarter, increasing by 69.6 billion yuan, compared with an advance of 102.2 billion yuan in the second quarter.

China's trade surplus of US$107.1 billion in the first nine months represented 2.4 percent of gross domestic product, versus a historical level of 4 percent to 9 percent, CCB International's Lam said. The nation's foreign-exchange reserves fell US$60.8 billion to US$3.2 trillion in September, the first decline since May 2010, indicating outflows of capital.

"The yuan is likely to see two-way fluctuations more often in the future given the nation's narrowing surplus in the international balance of payments," said Lu Ting, a Hong Kong- based economist at Bank of America Corp. "China won't see large-scale capital flight given the country's capital account controls."

Default swaps

Analysts have lowered their year-end forecasts for the yuan. The currency will reach 6.31 per dollar by December 31, according to the median estimate in a Bloomberg News survey, compared with a forecast of 6.28 at the start of the year.

Five-year credit default swaps protecting China's sovereign debt against non-payment dropped one basis point, or 0.01 percentage point, to 160 basis points yesterday, according to data provider CMA.