StanChart sees yuan fall against US dollar

The yuan is likely to depreciate against the US dollar this year due to weakening economic growth at home and slumping exports, Standard Chartered economists said yesterday.

The depreciation could affect the growth in yuan deposits in Hong Kong, and temper enthusiasm for the yuan's internationalisation as Beijing tries to promote the currency's use in trade settlement and investment.

'We think the volatility in the global economy and in Europe will make the Chinese authorities very cautious about allowing yuan appreciation,' said Robert Minikin, a strategist at Standard Chartered Bank. Appreciation could resume next year, he said.

The official China Securities Journal said yesterday in a front-page editorial that, as well as weakening the yuan, the central bank should also cut interest rates soon to help the economy and to boost confidence.

Minikin, however, does not think Beijing will re-peg the yuan to the US dollar as it did after the 2008 financial crisis, and sees it continuing to allow more two-way movement in the currency.

Beijing scrapped the yuan's decade-old peg to the dollar in July 2005 and allowed the currency to rise by 19 per cent against the US currency over the next three years. But in July 2008, when the global financial crisis erupted, it reinstated a de facto peg of 6.83 yuan to the dollar.

The peg was broken on June 19, 2010. The yuan is now pegged to a basket of currencies, and allowed to trade within a 1 per cent band on either side of a midpoint price set daily by the central bank.

Minikin said the US dollar was likely to strengthen to 6.31 against the yuan by the end of this year, as opposed to the bank's previous forecast of 6.21.

Standard Chartered expects that yuan deposits in Hong Kong will only reach as much as 650 billion yuan (HK$795 billion) by the end of this year, compared to a forecast of 700 billion to 800 billion yuan made in February.

Yuan deposits have dropped for five consecutive months in Hong Kong, to 552.4 billion yuan by the end of April, from 627.3 billion in November. However, Kelvin Lau, a senior economist at StanChart, said the rate of decrease had slowed in recent months.