Yuan continues to slip ahead of MSCI decision on A shares

Whether Chinese stocks are to be included in emerging market indices will be announced Wednesday

PUBLISHED : Monday, 13 June, 2016, 2:03pm
UPDATED : Monday, 27 June, 2016, 11:51am

The yuan fell to its lowest level in four months as traders continued to worry over huge mainland debt and potential stock market risks ahead, if MSCI decides not to include China’s domestically traded shares in its emerging-markets index on Wednesday.

Offshore yuan was trading at 6.6079 to the US dollar in early trade on Monday morning, its lowest since February 4 at 6.6185. The currency fell through the 6.60 level last Friday. It still, however, has some way to go to hit its weakest value this year, 6.7511 on January 7.

By 6.30pm on Monday, it had bounced back slightly to 6.5989.

Stephen Innes, senior trader at OANDA Asia Pacific, said: “Risk in the Chinese equity markets is expected to increase, which may lead to increased sell-offs in the days ahead.

“For anyone looking for a reprieve, the MSCI decision to include Chinese A shares in its emerging market indices will be announced on Wednesday.”

An inclusion of A shares in the MSCI index could benefit the yuan, as it would mean many of the passive fund managers that trade the indexes would need to buy in A shares.

But if MSCI decides against including A shares, that would add pressure to the currency.

Regardless of the decision, “we could be in for a bumpy ride”, Innes said.

Regardless of the decision, “we could be in for a bumpy ride”
Stephen Innes, senior trader at OANDA Asia Pacific

“Expect the Bank of Japan policy decision also to be on yuan dealers’ minds.

“If it surprises the markets this month with a rate cut and the yen does depreciate, it is expected the People’s Bank of China will then guide the yuan lower too.”

The People’s Bank of China on Monday set the yuan reference point against the US dollar at 6.5805, 0.32 per cent or 212 basis points weaker than on Friday. Traders are allowed to trade up to 2 per cent either side of the reference point for the day.

Onshore trade in the currency it also weakened Monday morning to 6.5891 early Monday, its weakest since June 1 before bouncing back to 6.5850 by 6.30pm, down 0.40 per cent from its last trading on Thursday before the public holiday, which is also its biggest fall in a month.

Innes said the yuan’s weakness was also related to the International Monetary Fund’s publishing of a paper over the weekend, “Rebalancing China: International Lessons in Corporate Debt”, which noted China’s spiralling debt has accelerated to 225 per cent of gross domestic product in the first quarter.

“This lending frenzy is an attempt by policy makers to reignite the economy.

“Even more telling, are the facts about the actual returns,” Innes said.

The IMF calculates state-owned enterprises account for about 55 per cent of China’s corporate debt, far greater than their 22 per cent share of economic output.

Jasper Lo, chief executive of King International, said the US Federal Reserve meeting this week on whether to increase interest rates again, as well as British referendum next week on whether to leave the EU, is also hurting the yuan.

“The possibility of an interest rate rise as well as the UK leaving the EU have added uncertainties on the stock markets, and on the yuan,” he said.