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Offshore yuan drops to six-year low even as central banker sought to sooth market’s concerns

“There’s no basis for the yuan’s continued depreciation,” the PBOC’s deputy governor Yi Gang wrote in an Op-Ed on Tuesday in the People’s Daily newspaper

PUBLISHED : Tuesday, 25 October, 2016, 3:43pm
UPDATED : Tuesday, 25 October, 2016, 11:30pm

Offshore yuan dropped to a record low on signs that capital was leaving China in greater amounts and at a faster rate, even as a deputy central banker sought to calm the currency markets through a government mouthpiece newspaper.

The yuan traded at 6.7816 per dollar at 5.30 pm in the offshore market in Hong Kong on Tuesday, after touching a low of 6.7880 overnight, the weakest intraday level since trading started in 2010. Onshore yuan was transacted at 6.7760 in Shanghai, also the lowest level in six years.

The offshore yuan rate has been touching record lows for three consecutive days, after Chinese policymakers set successively lower reference points to signal their willingness to allow for greater flexibility in the renminbi’s movement, amid an exports decline and an advance in the US dollar.

The People’s Bank of China set its daily reference rate of the yuan at 6.7744 against the dollar on Tuesday, 54 basis points lower than Monday and breaking the critical psychological point of 6.7700.

The index for the yuan’s value based on the market’s trade-weighted basket stood at 94.30 last Friday, down 0.4 per cent from the previous week, according to China Foreign Exchange Trade System’s data.

To stem the currency’s slide, the Chinese central bank’s deputy governor Yi Gang wrote a commentary in his name, published Tuesday in the People’s Daily, the government’s mouthpiece newspaper.

The yuan will remain “broadly stable,” according to Yi’s comment. “There’s no basis for the yuan’s continued depreciation,” he wrote.

“The Chinese currency has stayed stable against a basket of currencies,” according to Yi. “The yuan was less volatile than major reserve currencies, and its volatility was well below other emerging market currencies.”

At the same time, the central bank’s chief economist Ma Jun said on Tuesday that the yuan’s depreciation since October was primarily attributable to the rise in the US dollar index.

The US dollar index, a gauge of the greenback against a basket of major currencies, is trading at 98.68, pulling back from a high of 98.77, the highest level since February. It broke the major resistance of 98.60 last week.

The yuan’s recent performance has been in line with market expectation that the Chinese government will allow it to depreciate further after its inclusion as a member of the International Monetary Fund’s Special Drawing Rights (SDR) basket, by withdrawing support for the currency.

The Chinese currency has stayed stable against a basket of currencies. The yuan was less volatile than major reserve currencies, and its volatility was well below other emerging market currencies
Yi Gang, deputy governor, People’s Bank of China

“The PBOC is fine with the current move to 6.77-78 level, but they certainly want to slow down the rate of depreciation as capital outflows accelerate,” said Stephen Innes, a senior trader at Oanda.

Liang Hong, head of research at China International Capital Corp, agreed the weakening of the yuan is the response to a strengthening dollar, with the US dollar index having risen by about 3 per cent so far this month.

The yuan may trade at 6.75 per dollar by the end of 2016, Liang said, a weaker forecast than her previous expectation of 6.68 per dollar. The Chinese currency may depreciate by another 3 per cent to 6.96 per dollar by the end of 2017, she said.

“The yuan is still faced with depreciation pressure, with a strengthening US dollar and a prospect of a rise in capital outflows in the year end,” said Wang Han and Wang Yijun, analysts at Industrial Securities in their latest research note.

“The PBOC may consider actively release the pressure that could be brought by increased demand of foreign exchange at the year’s end,” they said.

The yuan may weaken further to 6.89 against the US dollar or even weaker within three to four weeks, according to a research note released by the Citibank on Tuesday.