After a highly volatile 12 months, the yuan finally looks like settling down
A year on from its dramatic devaluation, analysts think the Chinese currency has stabilised, ‘matured’ even. But it’s still expected to weaken further
A year to the day since Beijing’s surprise one-off depreciation of its currency, onshore yuan traded in Shanghai had weakened 6.69 per cent to 6.6387 against the dollar on Thursday, while offshore yuan traded in Hong Kong was down about 7 per cent to 6.6450 against the greenback over the same period.
Experts agree it has been a volatile year for the currency, but equally they now expect it to enter a more stable period, as the market gradually gets used to its ups and downs.
The seesawing started on August 11, 2015, China shifted the market mechanism for setting the yuan’s daily reference rate against the US dollar, by setting a spot rate based on the previous day’s close.
The People’s Bank of China had shocked financial markets the day before by cutting its daily reference rate by 1.87 per cent against the US currency.
Over the next three days, the Chinese currency tumbled by near 3,000 basis points, entering the era of 6.40 to the dollar. Analysts said the central bank’s move was to allow market forces to play a bigger role in the direction of its currency.
In December 2015, China then introduced the CFETS RMB Index, a new exchange rate gauge that values the yuan against a basket of 13 trade-weighted currencies, which was viewed by analysts at the time as the country’s next move to prepare for a stronger dollar, as the US Federal Reserve was expected to hike interest rates.
A month later, the PBOC surprised the market again with a string of big cuts of in the yuan’s reference rate. The currency fell sharply, leading to a surge in capital outflows that the Chinese authority have been trying to rein in since, by tightening capital controls and with various market interventions.
Over the past year, the PBOC’s daily reference rate for the yuan is down by 8.6 per cent or 5,093 basis points, from 6.1162 to 6.6255 on Thursday. Meanwhile, the CFETS RMB index has fallen, from 102.93 to 94.72 as of last Friday.
But after such a turbulent year, it seems the market is gradually getting used to the yuan’s roller-coaster tendencies, and investor panic is dissipating.
Recently, it has ever started to show signs of a rebound, “and I think that could be sustained for a while with the yuan a lot less volatile,” said Heng Koon How, senior investment strategist at Credit Suisse.
“The sharp decline in China’s foreign exchange reserves is basically over,” he added.
Adrian Mowat, chief Asian and emerging market equity strategist at JPMorgan, thinks what China now has is a “more mature currency market”.
“They [market players and investors] recognise the fact that the yuan, like every other currency, should [be allowed to] move up and down, and they shouldn’t be overly dramatic about the impact on it,” said Mowat.
From a long-term perspective, however, the yuan against the US dollar is still overvalued, according to Credit Suisse in its latest research note.
“We expect it to weaken further to about 7 against the US dollar in one year from now,” said Heng Koon How.
“the monetary authorities and the Chinese government would like to see two-side floating within a desired range against the fixing rate though the general trend would remain in depreciation, said Xing Dong Chen, Chief China Economist at BNP Paribas.