China’s currency seen poised for further devaluation after dismal kickoff to new year

Offshore yuan down 1.8 per cent in the first week of trade in 2016

PUBLISHED : Friday, 08 January, 2016, 9:33am
UPDATED : Friday, 08 January, 2016, 9:03pm

The international reputation of the yuan took a bashing in the first week of trade in the new year, shedding nearly 2 cent of its value per dollar, and hoisting itself onto the global radar as a weak currency.

The yuan traded in Hong Kong recovered slightly in Friday trading, edging up 0.06 per cent to 6.6838 per US dollar. The gains follow a stronger fixing by the People’s Bank of China, which set the reference rate on Friday morning stronger by 10 basis points to 6.5636 per US dollar.

On Thursday the yuan sank to 6.7511 against the dollar, its weakest level since the launch of the offshore market in 2010.

For the week, the currency was down 1.8 per cent, extending last year’s 5.3 per cent slide.

The yuan traded in Shanghai eased 0.07 per cent on Friday to 6.5878 per US dollar, bringing its decline for the week to 1.48 per cent.

It was the first time that the central bank set the reference price stronger against the US dollar in more than a week. The reference rate had been set lower against the greenback in each of the previous eight trading days. On Thursday, the PBOC set the daily fixing 0.5 per cent lower, which traders saw as a greenlight for the currency to devalue further. Under the China’s managed float system, the yuan is allowed to trade 2 per cent either side of the daily reference fixing by the PBOC.

While the PBOC’s yuan midpoint against the US dollar was set higher on Friday, yuan fixings were mixed against other leading currencies.

Against the euro the yuan was set at 7.7135, down 1.63 per cent. Against the yen, the daily fixing was set at 5.5872, down by 1.13 per cent.

Aidan Yao, senior emerging Asia economist at AXA Investment Managers, expects the yuan to fall 3 to 5 per cent this year, adding that the trade weighted exchange rate index, unveiled in December, which tracks the yuan against a basket of currencies, sets the stage for more depreciation.

“The intention (of the authorities) to keep the yuan stable should now be seen in the context of the currency index, not the bilateral cross rate versus the US dollar. The CNY/USD movement will hence be a by product of how the US dollar performs against other major currencies in the basket,” Yao said.

“Finally, on the real economy, we see the yuan depreciation as positive for exports and inflation. Although capital outflows can drain domestic liquidity, we do not see any signs of instability yet (apart from the equity market).

Paul Mackel, Global Head of Emerging Market FX Strategy at HSBC said while China announced this week that its foreign exchange reserves declined by US$108 billion in December, the actual decline could have been even larger, up to US$128 billion, which would be the largest monthly fall on record.

“The PBOC does not appear to have a problem with running down its reserves. It has been finding ways to make better use of its FX reserves, such as to recapitalize policy banks and support for Chinese corporates’ overseas expansion,” Mackel said.

“Given its goal for the yuan to become a major global reserve currency, which means China can eventually denominate most of its external borrowings in yuan, it can comfortably hold much lower reserves than it does today. The US Fed and the ECB, for example, hold very little FX reserves.”

A Barclays report said other Asian currencies have borne the brunt of pressure from a weaker yuan.

“It is difficult for almost all countries in the region to escape the pressure from weakening Chinese growth,” the Barclays report said.