Yuan Drop of 5% Seen by Macquarie as PBOC Seeks Orderly Market

The yuan’s biggest devaluation in two decades is fueling expectations of further declines in coming days, even as the central bank talks of stability.

The currency could be pushed 3 percent to 5 percent weaker against the dollar in the next few days, Macquarie Bank Ltd. estimated. The monetary authority will further devalue, possibly by more than 5 percent, said Liu Dongliang, a Shenzhen-based analyst at China Merchants Bank.

“The risk now is that investors see the yuan as a one-way bet weaker and start to position against the currency, raising the prospect of more substantial yuan weakness,” Stuart Allsopp, head of country risk and financial markets strategy at Business Monitor International, wrote in a note.

Tuesday’s move stunned investors made complacent by a de facto peg to the dollar that the People’s Bank of China had maintained since the end of March. While the stability was seen as being inspired by China’s desire to obtain reserve-currency status at an International Monetary Fund review in November, a recent proposal by agency staff to delay the process to September 2016 has given the nation more time and room to act.

Tuesday’s devaluation was a one-time adjustment and shouldn’t be interpreted as a sign that the yuan will enter a depreciation trend, PBOC chief economist Ma Jun was cited as saying in a Caixin report. The central bank said it will stabilize market expectations and ensure the new reference-rate mechanism will take effect “in an orderly manner.”

Fluctuations, Outflows

“The PBOC will likely intervene when volatility surges and it needs to ease wild fluctuations that may spur capital outflows,” said Hong Kong-based Eddie Cheung, a foreign-exchange strategist at Standard Chartered Plc. “One-way depreciation is not wanted also due to outflow concerns and for China’s push to globalize the yuan.”

The yuan fell 1.8 percent to close at 6.3231 a dollar in Shanghai Tuesday, after sliding 2.1 percent earlier. The currency had stayed close to 6.2 since the end of March. In Hong Kong, it slid 2.8 percent.

The central bank will make the yuan depreciate further because Tuesday’s 1.9 percent cut will have limited impact, said China Merchants Banks’ Liu. The PBOC said Tuesday that a strong yuan puts pressure on exports and cited a high effective exchange rate as a factor behind the devaluation. This came after data released Aug. 8 showed overseas sales dropped the most since March last month.

If the central bank allows quick depreciation, it would be “a sea change” that would support growth, UBS Group AG economists Wang Tao and Donna Kwok wrote in a research note. “However, we think it unlikely that the Chinese government will let only market momentum drive the exchange rate from now on, as that can be quite destabilizing.”

— With assistance by Tian Chen

Before it's here, it's on the Bloomberg Terminal. LEARN MORE