By Bloomberg News June 22 (Bloomberg) -- China’s yuan declined the most since December 2008 on speculation the central bank will encourage more two-way fluctuations in the exchange rate after it pledged to expand flexibility. The People’s Bank of China set the reference rate for yuan trading 0.43 percent stronger, the biggest gain in five years, reflecting appreciation yesterday. China’s reforms don’t necessarily mean the currency will appreciate, the official People’s Daily reported yesterday. “There is bigger two-way fluctuation, which is quite normal,” said Lu Zhengwei, an economist at Industrial Bank Co. in Shanghai. “The reference rate shows it is now based on market demand and supply, and no longer strictly controlled.” The yuan declined 0.2 percent to 6.8111 per dollar as of 10:17 a.m. in Shanghai, from 6.7976 yesterday, according to the China Foreign Exchange Trade system. That was the biggest loss since December 2008. It strengthened as much as 0.1 percent to 6.79 earlier today. The People’s Bank of China said on June 20 the yuan’s exchange rate is not too far from a level of equilibrium. It also reiterated that there is no basis for “large-scale” fluctuations in the currency. Reference Rate The yuan’s reference rate was set at 6.7980 per dollar, compared with 6.8275 yesterday. The 12-month non-deliverable yuan forwards climbed 0.2 percent to 6.6304, implying traders are betting on a 2.7 percent appreciation. “The fixing was at yesterday’s spot close, which indicates that true to their word, they are allowing market forces to play a greater role in determining the renminbi’s value,” said Mirza Baig, a Singapore-based currency strategist at Deutsche Bank AG, the world’s largest foreign exchange trader. “It also indicates that ahead of the G-20, they are willing to tolerate a more rapid appreciation of the yuan.” Chinese authorities had prevented the currency from strengthening against the dollar since July 2008 to help exporters cope with the global financial crisis. The currency appreciated 21 percent in the three years after a managed float against a basket of currencies was introduced in 2005. To contact the reporter on this story: Judy Chen in Shanghai at xchen45@bloomberg.net

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