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By Bloomberg

China’s yuan declined for a fourth day as the yield advantage on the nation’s debt over the U.S. narrowed on the diverging outlook for interest rates.

The yield premium on China’s 10-year sovereign bonds was 156 basis points, down from 2014’s high of 193 in February, data compiled by Bloomberg show. While the Asian nation cut interest rates for the first time in two years in November, the Federal Reserve indicated last week that it’s on course to raise borrowing costs next year. The People’s Bank of China reduced the currency’s daily reference rate by 0.02 percent to 6.1220 per dollar, the weakest level since Dec. 9.

“The narrowing yield differential means there could be some outflows from Chinese bonds and hence the yuan,” said Stella Lee, president of Success Wealth Management Ltd. in Hong Kong. “China’s economic slowdown and the outlook for a strengthening dollar are also weighing on the currency.”

The yuan fell 0.09 percent to 6.2255 against the greenback as of 10:16 a.m. in Shanghai, China Foreign Exchange Trade System prices show. The currency has lost 0.57 percent in four days and touched a six-month low of 6.2316 on Dec. 19. It traded at a 1.68 percent discount to the central bank’s daily fixing, within the 2 percent limit.

The exchange rate can remain stable at a reasonable equilibrium level while its flexibility has been increasing, Caixin, a local magazine, reported Dec. 21, citing PBOC Deputy Governor Yi Gang. One-month implied volatility in the onshore yuan, a measure of expected swings used to price options, dropped two basis points to 2.81 percent. The gauge rose to 2.97 percent last week, the highest since September 2012.

Offshore Market

China’s manufacturing industry is showing signs of slowing. The HSBC Holdings Plc and Markit Economics preliminary Purchasing Managers’ Index was 49.5 for December, compared with the 49.8 median estimate in a Bloomberg survey and a final reading of 50 in November. A level below 50 indicates contraction. The Bloomberg Dollar Spot Index jumped 0.9 percent last week to the highest level since 2009.

In Hong Kong’s offshore market, the yuan rose 0.05 percent to 6.2207 per dollar, within 0.1 percent of a six-month low of 6.2300 reached on Dec. 19, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards fell 0.02 percent to 6.3640, taking a four-day decline to 0.9 percent. The contracts traded at 2.2 percent discount to the onshore spot rate.