NewYuan under depreciation pressure as onshore-offshore gap widens

The gap between the yuan’s onshore and offshore exchange rates widened this week after almost being bridged since late September, refuelling concerns that the mainland currency is coming under pressure to depreciate.

Onshore yuan (CNY) was trading steady at around 6.35 to the US dollar this week, guided by a People’s Bank of China’s daily fixing rate that barely changed over the five-day period.

However, offshore yuan (CNH) depreciated by 0.5 per cent this week, resulting in an enlarged gap with CNY. The spread hit a monthly high of more than 390 basis points on Friday.

Koon How Heng, senior currency strategist at Credit Suisse, said the market was speculating over fresh cuts to reserve requirement ratios (RRR) in the wake of weak economic data this week.

The People’s Bank of China met those expectations last night when it cut benchmark one-year interest rates by 25 basis points, in the sixth cut since November, and also lowered banks’ required reserve ratios by 50 basis points, enabling them to lend more to support the real economy.

“The widening gap is because of increased expectations that the People’s Bank of China will cut RRR soon,” Heng said. “The rise in [CNH] trading volume is clearly an indication of increased speculative activity. I believe this CNH versus CNY spot spread will narrow once speculative activity lessens.”

He added that a more concerning sign was CNH forwards trading weaker again. The one-year non-deliverable forwards, which reflect the exchange rate’s future outlook, was trading between 6.51 and 6.52 against the US dollar.