Chinese yuan weakens after its recovery from a three-month low

Onshore yuan in Shanghai traded at 6.5570 to the US dollar despite the PBOC raising the reference point.

PUBLISHED : Thursday, 26 May, 2016, 12:18pm
UPDATED : Monday, 27 June, 2016, 11:51am

The Chinese yuan weakened on Thursday morning after it had recovered slightly from a three-month low.

Onshore yuan in Shanghai traded at 6.5570 to the US dollar at 10.30 am. That is 0.05 per cent, or 30 basis points, weaker compared with its closing price on Wednesday.

China’s currency had rebounded slightly after it tumbled to its lowest level against the US currency in three months on Wednesday after the country’s central bank set its weakest fixing in five years.

The People’s Bank of China (PBOC), the country’s central bank, on Thursday set the yuan reference point against the US dollar at 6.5552, 141 basis points stronger than on Wednesday. Traders are allowed to deal up to 2 per cent either side of the reference point for the day.

The currency traded offshore in Hong Kong at 6.5602 to the US dollar at 10.30 am. That is 0.06 per cent, or 40 basis points, stronger than Wednesday.

Jasper Lo Cho-yan, chief executive of King International Financial, said the onshore yuan will continue to weaken, reflecting concerns over a possible interest rate hike by the US Federal Reserve — central bank to the world’s largest economy — that put pressure on the Chinese currency.

Why does China fix its foreign exchange rate?

“Media reports said Chinese authorities are planning to ask US Fed officials about their timetable of an interest rate hike, which shows that the authorities are even worrying about the weakening of the currency,” Lo said.

Chinese officials are said to have plans about asking Fed officials about the timing of the rate hike next month, according to a Bloomberg report on Wednesday that cited unnamed sources familiar with the matter.

The report added that a PBOC press officer later denied the claims.

Lo added that even though the PBOC is likely to intervene if the yuan depreciates too much as a result of the Fed rate hike, it is unlikely that the central bank has returned to a tightly controlled currency mechanism.

Lo was referring to a Wall Street Journal report on Monday that the PBOC has discarded a market-based mechanism and set the exchange rate back to one that has suited authorities’ needs since January. It cited unnamed sources close to the central bank.

“It’s unlikely that the PBOC will backtrack on what’s already been decided. The central bank in the long term still wants the Chinese currency to be traded freely in the future,” Lo said. “They will accept that the yuan will gradually depreciate in an orderly manner. Having said that, if the currency movements become too turbulent, the PBOC will also intervene,” he said.