Yuan weaker on Thursday after China’s central bank stops intervention
DBS estimates People’s Bank of China has spent US$661 billion to safeguard currency in past 18 months
Offshore yuan weakened again on Thursday morning after the People’s Bank of China stopped its aggressive intervention in the market on Wednesday,
At 10am, offshore yuan (CNH) was trading at 6.5951, weaker by 0.46 per cent from Wednesday.
A DBS report said the PBOC’s intervention had been an expensive exercise, estimating the central bank had spent US$661 billion from July 2014 to the end of last year.
“In all, the authorities have spent US$661 billion – 6.4 per cent of 2014 GDP – pushing and pulling the RMB this way and that,” the report said. “It could have spent that money restructuring a few banks or steel mills or state governments instead.”
The report said Beijing wanted to display “leadership” in the run-up to the International Monetary Fund’s decision to include the yuan in its Special Drawing Rights (SDR), which had led the yuan, also known as the renminbi (RMB), to keep pace with the US dollar last year.
“Now China wants to go home again and it can’t. After the RMB was included in the SDR, authorities announced they would pursue the basket strategy they should have pursued all along,” the DBS report said. “Markets interpreted the divorce with the dollar as an official wish for a weaker currency and wasted no time in granting it.
“All of which forced the authorities, who spent US$341 billion between July 2014 and August 2015 pushing the RMB north, to spend almost that much again (US$321 billion) trying to prevent it from falling too rapidly back to earth.”
It added: “The authorities would have to spend a lot more reserves trying to make the path a smooth one. By the time the RMB got home, the cupboards could look pretty bare.”
The central bank kept buying yuan in the Hong Kong offshore market on Monday and Tuesday, which dried up the market and pushed borrowing interest rates for overnight offshore yuan funding as high as a record at 200 per cent on Tuesday in order to drive away speculators short selling the currency. The interest rate returned to normal – about 3 per cent – on Wednesday afternoon, after fixing at 8 per cent in the morning.
This boosted the offshore yuan 1.7 per cent higher in the first three days of the week and wiped out all the devaluation seen last week. However, the end of central bank intervention has led the currency down again.
Onshore yuan (CNY) is trading at 6.5843, weaker by 0.16 per cent from Wednesday.
The offshore yuan now trades at a discount of 108 basis point to the onshore yuan, compared with a premium of about 20 basis point on Wednesday. The spread was so wide last week that the offshore yuan at one stage last Thursday dropped to a record discount of 1,400 basis points.
The PBOC set the onshore yuan mid-price against the US dollar 14 basis points stronger at 6.5616. The central bank had set the mid-price lower for the past two days.
It set the mid-price against the euro weaker by 257 basis point to 7.1468, while it set that for every 100 yen to 5.5857, weaker by 84 basis points.
The mid-price against the British pound strengthened by 337 basis point to 9.4609.
Traders are allowed to trade 2 per cent either side of the mid-price.
The overnight funding fixing by the Treasury Markets Association at 11.15am fell to 3.6 per cent on Thursday, down from 8 per cent on Wednesday. The one-week funding however remain high at 10.96 per cent and two-week at 10.25 per cent, while one-month was at 9.75 per cent and three-month at 8.18 per cent.