Offshore yuan falls to seven-month low
Investors concerned that moves by Beijing to shore up economic growth in the short term could worsen the already significant debt problems
The yuan fell to a seven-month low in offshore intraday trading yesterday, signalling a vote of no confidence in Beijing's vow to maintain annual economic growth at 7.5 per cent and a sign of concern over the mainland's lending and credit risks.
Premier Li Keqiang called for a "balanced" monetary policy, a change in tone and in contrast to the "prudent" monetary policy used last year in opening the annual session of the national legislature in Beijing.
That soon sparked concerns among offshore investors whether it means Beijing would open the credit tap to shore up growth, a move that would provide a short-term boost to the economy but could further worsen the already significant debt problems in the country.
"We do not expect the weakening in the exchange rates to trigger a crisis, but we are concerned about credit risks as trust funds are about to enter the repayment peak season," said Credit Suisse research analyst Dong Tao.
A third of the outstanding 4.6 trillion yuan (HK$5.8 trillion) in trust loans are due to mature this year, with more than 500 billion yuan of such products set to mature in the second quarter alone.
The yuan touched 6.1383 against the US dollar in offshore trade yesterday morning, its weakest level since July last year, before strengthening in the afternoon.
However, on the domestic market, where the yuan is controlled more firmly by regulators, the currency posted its biggest gain since December 2012 by hitting 6.1278 to the dollar on speculation Beijing wants to boost confidence over its newly announced economic plan.
Morgan Stanley analyst Geoffrey Kendrick sees the central bank's intervention being far from over.
"At this moment, we think the [People's Bank of China] has not completed its goal on the [foreign exchange] side because inflows will continue to compress volume and drive the [yuan] stronger if the PBOC steps away from the market and stays passive," Kendrick said.
"While we believe the PBOC has not changed its monetary policy stance, tolerance of loose liquidity in the near term might serve to reduce constraints on the [foreign exchange] operations it wants to pursue."
Offshore investors were not encouraged after the central bank set its official midpoint at a three-month low, a sign for them that the yuan is no longer a one-way, appreciating bet.
Beijing has been setting the yuan's exchange rate at a weaker level against the dollar each day since February 18, in a signal it could soon double the trading band of the currency to introduce more two-way risks.
"Beijing's frequent attempts to 'teach lessons' are also cause for concern regarding policy mistakes," Tao said.