Yuan set for biggest decline in 20 years

PUBLISHED : Tuesday, 01 April, 2014, 1:20am
UPDATED : Tuesday, 01 April, 2014, 1:20am

The yuan was set to complete the biggest quarterly decline in two decades after the mainland's central bank widened the currency's trading band amid concern growth in the economy is losing momentum.

The People's Bank of China doubled the yuan's permitted divergence from a daily reference rate to 2 per cent on March 17. The central bank has since cut the fixing by 0.28 per cent, setting it at a six-month low of 6.1521 per US dollar yesterday. The mainland's official Purchasing Managers' Index will probably be 50.1 for March, the weakest since June, according to the median estimate of a survey before data due today.

"The yuan is under pressure on capital outflows as expectations for yuan appreciation have greatly reduced," said Meng Xiangjuan, Shanghai-based senior macro analyst at Shenyin Wanguo Securities. "Investors have become more pessimistic on China's economic outlook. The yuan is likely to stay weak in the first half of this year."

The currency slid 2.8 per cent this quarter in Shanghai, the most in China Foreign Exchange Trade System prices dating back to 2007. That's also the biggest decline since the January-March period of 1994, after the government unified the official and market exchange rates at the start of that year.

China posted an unexpected slump in exports in February and a slowdown in factory output and retail sales in the first two months of this year.

The period of steady and predictable yuan gains is over and the outlook will depend on factors including foreign-exchange reform liberalisation, economic fundamentals and China's push to promote the yuan's global usage, Dariusz Kowalczyk, a Credit Agricole CIB strategist, wrote in a note yesterday.