21/07/2016 06:13 AST
After its worst quarter on record, the yuan may finally be headed for a break.
The People’s Bank of China (PBoC) will hit the brakes on depreciation to avoid sparking global volatility and exacerbating capital outflows, according to Svenska Handelsbanken, the currency’s top forecaster. The case for an end to yuan weakness is supported by its impending entry into the International Monetary Fund’s reserves basket in October as well as a dovish Federal Reserve spurring dollar declines, says JPMorgan Asset Management.
The yuan has posted Asia’s biggest decline this year on speculation policy makers were guiding depreciation against both the greenback and a trade-weighted gauge as they looked to boost exports and revive economic expansion. Things may finally be turning around, with data from gross domestic product to retail sales spurring optimism that growth will steady and that the monetary authority will refrain from aggressive easing.
“They will take a breather now and celebrate that they have managed to depreciate the yuan without creating too much noise and without creating too much capital outflows,” said Bjarke Roed-Frederiksen, a Copenhagen-based economist at Handelsbanken, the most accurate yuan forecaster tracked by Bloomberg over the last four quarters.
There are already signs of the weakness abating. The yuan briefly erased its losses against the dollar last week, halting a five-week run of losses, before a late resurgence in the dollar. A Bloomberg replica of the 13-currency CFETS RMB Index advanced for the first time since May in the five days through July 15. The currency’s run of losses this time round has avoided sparking the sort of market panic seen in August and January, when yuan weakness roiled global markets and spurred speculative bets against the exchange rate.
This is because China’s central bank has improved its communication with markets, provided clarity on how it sets its daily reference rate and taken steps to prevent a downward spiral of depreciation and capital outflows. The PBoC also probably understands that it has pushed the envelope far enough for now, according to Roed-Frederiksen.
“I think they realised they probably shouldn’t move any further for the moment,” he said, adding that the PBoC may opt for slight depreciation again in the fourth quarter to finish the year at 6.8 a dollar. “They are satisfied with what they have achieved for now and they are - or at least should be - afraid global investors’ focus will return and also that domestic investors will start worrying again about depreciation and thus increase capital outflows.”
An estimated $1tn left China last year as the yuan’s abrupt devaluation in August prompted firms to repay their foreign debt and local investors to pour cash into overseas assets. As the yuan stabilised, monthly outflows slowed to an average $68.6bn through May this year, compared with $113bn in the second half of 2015. Foreign-exchange reserves unexpectedly increased in June, a sign outflows are slowing.
There are some fundamental reasons for the yuan to stabilise, according to Ji Mo, Hong Kong-based chief economist for Asia ex-Japan at Amundi. She estimates that the foreign- currency debt of Chinese companies has dropped to about $500bn from $1.1tn at end-2015, reducing repayment pressures.
Speculation that authorities were curbing declines in the exchange rate resurfaced last week when the overnight yuan interbank rate in Hong Kong jumped to a five-month high. The yuan index’s gain last week indicates that the PBoC may have intervened to stem depreciation, said Zhou Hao, an economist at Commerzbank in Singapore.
The yuan rose 0.16% on Tuesday, the most in more than a week, to trade at 6.6909 against the greenback, after weakening beyond 6.7 for the first time since November 2010 in the previous session as better-than-expected US economic data buoyed the dollar. The Chinese currenc
Gulf Times
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