Yuan on track for biggest weekly loss, market reforms in focus

The Chinese yuan has firmed every year against the dollar since 2010 with recent gains coming amid very little volatility

and despite widespread weakness among emerging market currencies, fuelling growth of speculative capital flows.

Those hot-money inflows -- UBS estimates that amount at more than $150 billion in 2013 -- have complicated the task of the

central bank's policy management as it seeks to curb the growth of shadow banking activities.

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The yuan's dramatic fall since last week is aimed at stamping out those speculative plays.

"Have you changed your expection of the yuan to depreciation? If not, I suggest changing it as soon as possible.

I have changed mine and think it will stay weak for the next three months," said a trader at a Chinese bank in Shanghai.

Regarding the yuan's recent sharp decline, China's foreign exchange regulator has launched an investigation into its possible impact on foreign exchange transactions at domestic banks and companies, banking sources said on Thursday.

Despite the slump in the past two weeks, which has seen the yuan lose 1.8 percent against the dollar, a rare phenomenon in

its history, analysts do not think it will be the trend in the long term.

The world's second-largest economy is still under pressure from heavy capital inflows both under the current account and

the capital account. Higher interest rate levels and better economic fundamentals will continue to attract fund inflows.

The market is keeping a close eye on the National People's Congress to be held from next Wednesday, as traders think it may be the time the central bank announces important policies on the foreign exchange market.

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