UBS to Citigroup Say Yuan May Weaken After Surprise Export Drop

China may allow the yuan to weaken in the second half to aid exports (CNFREXPY) after June shipments contracted by the most since the global financial crisis, according to economists from UBS AG to Citigroup Inc.

The currency should be allowed to depreciate “at least marginally,” Wang Tao, Chief China Economist at UBS in Hong Kong, wrote in an e-mailed interview. Ding Shuang, Citigroup’s senior China economist, expects “periodic depreciation,” while Credit Suisse Group AG’s Tao Dong said he anticipates a “minor” decline against the dollar.

Exports unexpectedly fell 3.1 percent last month, while imports dropped 0.7 percent, official data showed, underscoring the severity of the slowdown in the world’s second-biggest economy as Premier Li Keqiang reins in credit. China may fail to achieve its trade target for a second year if the softness persists, according to Australia & New Zealand Banking Group Ltd. The yuan is the sole gainer among Asian currencies this year, putting the nation at a disadvantage in terms of overseas sales.

“Given a strong yuan relative to other Asian currencies, export competitiveness will continue to erode,” Liu Ligang, ANZ’s head of Greater China economics in Hong Kong, wrote in a research note today. “With this in mind, we see a downside risk for the RMB exchange rate.”

The currency, also known as the renminbi, slipped 0.07 percent to 6.1338 per dollar as of 2:26 p.m. in Shanghai, according to China Foreign Exchange Trade System prices. The yuan has climbed 1.6 percent against the dollar this year and reached 6.1210 in May, the strongest since the government unified official and market exchange rates in 1993.

U.S. Dialogue

U.S. Treasury Secretary Jacob J. Lew said China needs to move toward a more market-determined exchange rate, calling changes in the yuan’s value inconsistent, as the two countries prepare to meet in Washington for two days of strategic and economic talks that are held every year.

The People’s Bank of China strengthened the daily fixing by 0.13 percent, the most since June 7, to 6.1652 per dollar today, which reflects the bilateral talks rather than trade data, Citigroup’s Ding wrote in an e-mailed interview.

“This can be reversed following the annual dialogue,” Ding said. “We expect two-way volatility of the RMB in the second half, with periodic depreciation likely in time of capital outflows.”

--Zhang Dingmin. With assistance from Kevin Hamlin in Beijing. Editors: Simon Harvey, Anil Varma

To contact the Bloomberg News staff on this story: Zhang Dingmin in Beijing at dzhang14@bloomberg.net;

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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