Across The Border

Yuan stabilises but doubts over how long the calm can last

Onshore and offshore yuan claw back most of their losses this year but analysts still see volatility ahead

PUBLISHED : Friday, 19 February, 2016, 3:14pm
UPDATED : Thursday, 25 February, 2016, 12:02pm

Onshore and offshore yuan stabilised this week after clawing back most of their losses this year but analysts still see volatility ahead despite assurances from the central bank.

The yuan is steady at about 6.50 to the US dollar in both the onshore and offshore markets this week, the strongest level seen in recent months.

The rise of the yuan over the past two weeks was mainly because the US dollar turned weaker against other currencies, said Pheona Tsang, head of fixed income for BEA Union Investment.

“The onshore yuan recently strengthened with the weakening of the US dollar against other trading partner currencies, especially the Japanese yen and euro. This is in line with the new onshore yuan basket system where the currency can both appreciate and depreciate against the US dollar,” she said.

“Since the global currency market remains volatile and moves with expectation of different monetary policies of various central banks, volatility remains in the onshore yuan,” she added.

The strengthening of the yuan also came after People’s Bank of China governor Zhou Xiaochuan last week vowed the yuan would not devalue sharply.

The onshore yuan had the biggest single day jump in a decade to increase 1.17 per cent against the US dollar on Monday. It traded at 6.52 per US dollar on Friday morning. The currency has depreciated against the US dollar by 0.4 per cent this year, down from 1.52 per cent in the first week of the year.

As of Friday morning, the offshore yuan is up 0.64 per cent against the US dollar so far this year, reversing a 2 per cent depreciation in the first week of 2016.

The weaker yuan came about amid China’s slowing economy and the PBOC’s one-off 2 per cent devaluation of the currency in August last year. The yuan lost over 5 per cent to the US dollar last year.

Some hedge fund managers have said they see the yuan declining as much as 40 per cent over the next three years, while others have forecast a 5 to 10 per cent depreciation this year.

A Bank of America Merrill Lynch research note issued earlier this week stated that the yuan would continue to be volatile during the year.

“While most commentators focused on PBOC’s desire to maintain RMB stability and tame speculators, our key take-away [from PBOC governor Zhou’s interview] is that RMB/USD rate may become more volatile, especially if USD dollar starts to strengthen again,” the report said.

Nothing has changed in terms of risks from China’s growth slowdown, FX reserve contraction and persistent capital outflow
Heng Koon How, Credit Suisse

“Also it appears that governor Zhou has ruled out capital controls and any major global coordination on currencies in the foreseeable future. Elsewhere, PBOC just opened the inter-bank bond market to retail investors, perhaps to help local governments to sell bonds. In the unlikely event that retail investors rush to invest in bonds, their direct exposure may become another source of financial instability in the long run,” the report said.

While Zhou said China has the ability and a large trade surplus to defend the currency, the Merrill Lynch report disagreed.

“We believe that a lack of profitable opportunities in the domestic market, inflated asset prices, and the risk of financial system instability in China will continue to drive capital out of the country. We suspect that the government may lose its ability to defend RMB within a year or two if the current pace of capital outflow continues,” the report said.

“From this perspective, a large trade surplus is not necessarily a positive sign as it may mean a stronger desire for domestic capital to leave. This appears to be the case in January as official FX reserves fell by another US$100 billion despite the record trade surplus.”

Heng Koon How, senior currency strategist at Credit Suisse, remains negative on the outlook of the yuan.

“Our view is that nothing has changed in terms of risks from China’s growth slowdown, FX reserve contraction and persistent capital outflow,” Heng said.

Ken Wong, client portfolio manager at Eastspring Investments (Hong Kong), said governor Zhou’s remarks could bring some stability to the yuan over the next six months.

“The market is expecting the PBOC to continue to improve its communications over FX policies. With his comments on the PBOC policy decision and also the fact that he eased concerns over any substantial depreciation of the RMB, Zhou Xiaochuan has momentarily installed some confidence into the RMB,” Wong said.

Wong also said Beijing would like to see a stable yuan because China is hosting the G20 summit in Hangzhou in September this year, and it has also invited quite a number of non-G20 countries to participate as well. “China certainly doesn’t want to have a global forum where a major topic would be on the ongoing concerns of the RMB. We believe China would much rather focus its attention on more meaningful economic topics.”

Christopher Cheung Wah-fung, Hong Kong legislator for the financial services sector, said a stable yuan would benefit the stock market and other investments.

“There is a strong relationship between the currency and stock market. When the yuan became stable in this week, the stock markets in Hong Kong and the mainland turned stable. A weak yuan has led to capital outflow which is why China would like to see a stable yuan and stock market. We hope this situation would continue for the longer term,” Cheung said.