Yuan in Hong Kong Gains as PBOC Fixing Backs Up Stability Pledge

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The offshore yuan advanced for a fourth day, with the central bank’s reference rate backing up recent messages of stability after a shock devaluation rattled global markets last week.

The People’s Bank of China’s daily fixing was little changed at 6.3966 a dollar, within 0.03 percent of Monday’s close. The nation’s foreign-exchange reserves will drop by $40 billion a month amid intervention to support the currency, according to the median estimate in an Aug. 14 Bloomberg survey. The yuan’s adjustment is “basically already completed,” PBOC Assistant Governor Zhang Xiaohui said on Aug. 13.

“A steady fixing is stabilizing the market after last week’s unexpected move,” said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong. “The reference rate remains an important guide to the PBOC’s stance, which wants to keep the decline at a controllable pace to avoid any financial risks.”

The yuan traded freely in Hong Kong rose 0.09 percent to

6.4417 a dollar as of 4:53 p.m. local time. In Shanghai, the currency closed at 6.3938, little changed from Monday’s 6.3947. The onshore spot rate lost 3 percent in three days last week after the central bank devalued the currency in a move that rattled global markets. The onshore yuan erased an earlier decline as major Chinese banks were seen selling dollars toward the close of trading amid tight liquidity.

The devaluation amid official statements that there was no reason for further depreciation reflects the dilemma for policy makers as they try to balance the need for financial stability with a desire for stronger exports and the yuan’s inclusion in the International Monetary Fund’s basket of reserve currencies.

Outflow Concern

Chinese banks sold a net 174 billion yuan ($27 billion) of foreign currency for clients in July, compared with a net purchase of 54.7 billion yuan in the previous month, the State Administration of Foreign Exchange said on Tuesday.

The People's Bank Of China (PBOC) headquarters stands in the financial district of Beijing, China
The People's Bank Of China (PBOC) headquarters stands in the financial district of Beijing, China
Tomohiro Ohsumi/Bloomberg

“The data point to imbalance in the market and outflows have possibly accelerated,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB, which expects the yuan to trade at 6.5 a dollar by the year-end.

Under a new methodology used to determine the reference rate, market makers who submit contributing prices have to consider the previous day’s close, foreign-exchange demand and supply, as well as changes in major currency rates, the PBOC said on Aug. 11. Policy makers didn’t elaborate on the central bank’s role in setting the fixing, from which the yuan can diverge by a maximum 2 percent in Shanghai.

Forecast Cut

Goldman Sachs Group Inc. lowered its forecast for the yuan, saying China’s deepening economic slowdown will weaken the currency and increase volatility. The yuan will decline to 6.60 a dollar in 12 months, and to 6.70 by the end of 2016, London-based strategist Kamakshya Trivedi wrote in a note Monday. The bank previously predicted the currency would trade at 6.15 and

6.20 by those dates, respectively.

“On a longer horizon, the risks are tilted towards further yuan weakness,” Trivedi wrote. “China’s bumpy downshift in growth is likely to extend, making for greater macro and market volatility along the way.”

A gauge of the onshore yuan’s expected price swings against the dollar fell for a fourth day. The currency’s one-month implied volatility dropped 54 basis points to 4.69 percent, compared with 1.17 percent before the devaluation.

China’s holdings of Treasuries rose by about $900 million to $1.27 trillion in June, according to Treasury Department data released Monday in Washington. The Asian nation remains the debt’s largest foreign holder, followed by Japan.

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