Yuan in Hong Kong Drops as China Pledges to Limit Intervention

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The yuan traded in Hong Kong fell to a one-week low after China committed to limiting foreign-exchange intervention as it concluded an annual dialog with the U.S.

The Asian nation said it will move to a more flexible, market-based currency while pledging to make its exchange-rate policies more transparent as officials wrapped up diplomatic and economic talks. China will “steadily” increase the yuan’s convertibility as it bolsters the case for it to be included in the International Monetary Fund’s reserve-currency basket, a deputy governor of the People’s Bank of China said Friday.

“The pledge of less intervention makes investors pessimistic because they expected the PBOC to support the yuan as the economy is slowing,” said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong. “But making the yuan a reserve currency is still the priority for China, so it won’t let it fall sharply this year.”

The offshore yuan in Hong Kong, which is free from the mainland’s capital controls, dropped 0.04 percent to 6.2071 a dollar as of 4:58 p.m. local time, data compiled by Bloomberg show. It fell to 6.2111 earlier, the weakest since June 19. The onshore rate, which is constrained by a daily central bank fixing, was little changed to close at 6.2090 in Shanghai, according to China Foreign Exchange Trade System prices.

The central bank raised the yuan’s daily reference rate by 0.02 percent to 6.1137 a dollar on Friday, the first increase in four days. The gap between the onshore yuan and the fixing was 1.56 percent, within the 2 percent daily limit.

More Liquidity

The PBOC auctioned 35 billion yuan ($5.6 billion) of seven-day reverse-repurchase contracts on Thursday, using open-market operations to inject funds for the first time in two months, which boosted supply of the currency. The central bank has cut interest rates three times since November and eased lenders’ reserve requirements twice to help revive an economy expanding at the slowest pace since 1990.

“The yuan faces huge pressures as there’s more liquidity due to the reverse repo,” said Banny Lam, co-head of research at Agricultural Bank of China International Securities Co. in Hong Kong. “China’s economy has been recovering at a very slow pace, so it might do reverse repos or cut reserve-requirement ratios again to add more funds.”

China’s goal of getting the IMF to endorse the yuan as a reserve currency will be achieved this year, according to 11 out of 16 economists polled by Bloomberg in the June 18-24 period.

— With assistance by Tian Chen

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