China’s yuan strength becoming ‘increasingly uncomfortable’ for Beijing amid economic slowdown
- The weekly average of the gap between the People’s Bank of China’s (PBOC) daily yuan reference rate and market estimates widened to 68 basis points
- This was the highest on record since Bloomberg started the survey with analysts and traders in 2018
China made its biggest push to weaken the yuan through its currency fixings this week as coronavirus-related curbs and rising commodity prices threatened to slow the economy.
The weekly average of the gap between the People’s Bank of China’s (PBOC) daily yuan reference rate and market estimates widened to 68 basis points, the highest on record since Bloomberg started the survey with analysts and traders in 2018.
The bulk of the move came on Monday and Tuesday, when the fixing deviated 150 pips and 129 pips respectively from forecasts.
Clearly the authorities are becoming increasingly uncomfortable with yuan strength at a time of slowing economic momentum
They could also help correct the divergence in the onshore and offshore yuan, a former State Administration of Foreign Exchange said.
“Clearly the authorities are becoming increasingly uncomfortable with yuan strength at a time of slowing economic momentum,” said Mitul Kotecha, chief emerging market Asia and Europe strategist at TD securities.
“A stronger yuan will result in worsening exports competitiveness at a time of slowing global activity.”
The onshore yuan has fallen 0.8 per cent this month, but it is still Asia’s second-best-performing currency this year.
It advanced in the previous two sessions on a relief rally across mainland assets spurred by policymakers’ pledge to support markets and boost the economy.
Guan Tao, a former official at the State Administration of Foreign Exchange and a current member of the China Foreign Exchange Committee, said on Tuesday that the weak bias in the fixings could address the structural difference between the onshore and offshore yuan.
The gap between the two widened to 295 pips on Monday, the highest level since June.
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The onshore unit is being supported by US dollar selling by exporters, whereas the offshore rate is weighed by stock outflows, Guan said.
The onshore yuan fell by 0.1 per cent to 6.3535 per US dollar on Friday, while the offshore yuan was little changed at 6.3648 per US dollar.
Kotecha sees the onshore yuan weakening to 6.45 per US dollar by the end of the year.
The volatile yuan-rouble currency pair and the PBOC’s move to widen its trading band also allows for a larger margin for errors in estimating the yuan fixing.
This week’s signal is to remind the market not to push yuan appreciation too far, and to introduce some two-way flexibility
People familiar with the matter at two quotation banks said they had not changed their fixing formulation method this week. They asked not to be identified.
The China Foreign Exchange Committee, an organisation formed by key participants of onshore market under the guidance of the PBOC, did not immediately respond to a request seeking comment.
“This week’s signal is to remind the market not to push yuan appreciation too far, and to introduce some two-way flexibility,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group.
“We do not believe the authorities intend to change the trend and engineer a weakening path for the currency.”
