Yuan weakens after China’s forex reserves jump back above US$3 trillion
Beijing may tolerate a more volatile yuan after February’s forex data suggests capital controls are working, according to some analysts
Offshore Chinese yuan declined on Wednesday against the US dollar after the People’s Bank of China guided it to the lowest level in almost two months.
Offshore yuan, which trades mainly in Hong Kong, dropped 0.04 per cent to 6.8997 per dollar as of 12.15pm, compared with 6.8938 late on Tuesday. In the past month, the rate has depreciated almost 1 per cent.
The spot yuan briefly fell in Shanghai earlier in the morning, but then reversed its course and ticked higher by 0.01 per cent to 6.8993 per dollar by 12.15pm. Nonetheless, the onshore rate has weakened by 0.5 per cent versus the greenback since the start of February.
Earlier in the day, the People’s Bank of China set the yuan’s mid-point rate at 6.9032 per US dollar, the lowest since January 12, and down by 75 basis points from the previous fix of 6.8957.
Government statistics released on Tuesday showed China’s foreign exchange reserves rose by US$6.9 billion in February to US$3.005 trillion, above market consensus estimates, and the first monthly increase since June.
Many market watchers interpreted the surprise increase as a result of tighter capital controls and a sign that Beijing may tolerate a more volatile yuan further down the road.
“The February FX reserve data suggests that the policy efforts to contain capital outflows may have started to show some impact,” said Grace Ng and Haibin Zhu, analysts for JP Morgan, in a research note on Wednesday.
Excluding currency valuation effects, the forex reserves may have risen US$23 billion in February, in stark contrast with January’s decline of US$38.8 billion, JP Morgan estimated.
“Stricter capital outflow measures imposed on individuals and corporates may have in the near term managed to slow private sector capital outflows,” the analysts said.
However, Julian Evans-Pritchard and Mark Williams, economists at Capital Economics, said closures of banks during the Chinese New Year holidays in February may have caused disruption to capital flows. They believe the picture will become clearer after the PBOC publishes its balance sheet data later this month.
Societe Generale analysts expect Beijing to become more tolerant of the yuan’s depreciation in the near future, based on their interpretation of the wording of the new government work report released at the annual parliamentary sessions in Beijing.
“This year’s government work report left out the familiar phrase of ‘keep RMB relatively stable around an appropriate level’ and replaced it with ‘to maintain the stable status of the renminbi in the international currency system’,” said Wei Yao, a China economist for Societe Generale.
“This omission of the old phrase has drawn much attention and been taken as a signal that Chinese policymakers are ready to embrace more volatility or even more depreciation of the RMB.”
As developments in the past two years have illustrated, China’s pledge to “keep the renminbi stable” could still mean further depreciation against the dollar or the basket of currencies, Yao added.
In other forex trading on Wednesday, the ICE US Dollar Index, a measure of the greenback’s strength against six currency rivals, moved lower to 101.75 from 101.81 late on Tuesday.
Against the Japanese yen, the US dollar fell sharply, down 0.3 per cent to ¥113.66.
The euro weakened slightly against the US currency, trading at US$1.0564 from US$1.0566 late on Tuesday. However, sterling rose to US$1.2207 from US$1.22 in the prior session.