- Yuan has climbed gradually since August amid intervention
- U.S. rate rise would provide an excuse for retreat: analyst
China’s support for the yuan is likely to be pulled once the currency has won reserve status at the International Monetary Fund, according to David Woo, Bank of America Corp.’s head of global rates and foreign-exchange research.
The People’s Bank of China has strengthened the yuan gradually since an Aug. 11 devaluation with a mix of intervention and steady fixings, even as the economy showed few signs of improvement and capital outflows picked up. The support helped damp volatility in the exchange rate before the IMF conducts a twice-a-decade review of its Special Drawing Rights basket this month. Once China has SDR under its belt, it will let the yuan weaken, especially if the Federal Reserve raises rates by year-end, said Woo.
"After the SDR they no longer have the incentive to prop up the renminbi," he said Friday in an interview in Taipei. "A December hike by the Fed would give the Chinese a perfect excuse to let the renminbi go because they can make a strong case that they need to decouple their monetary policy from that of the U.S."
China has made a dent in its foreign-exchange reserves over the past year as it supported the yuan while cutting benchmark interest rates six times to help combat an economic slowdown. On Aug. 11, it pushed the yuan down by a record to align it with market forces, a sign that maintaining a stable currency while easing monetary policy was becoming untenable. PBOC Deputy Governor Yi Gang said at the time a flexible exchange rate would increase room for the monetary authority to adjust policy.
The yuan has weakened 0.7 percent to 6.3622 per dollar so far this month in Shanghai, after gaining 0.6 percent in October and 0.3 percent in September. IMF representatives have told China that the yuan is likely to join the fund’s basket of reserve currencies soon, Chinese officials with knowledge of the matter told Bloomberg last month. Bank of America forecasts the yuan will end 2016 at 6.9, compared with the median estimate of 6.6 in a Bloomberg survey of analysts.
New York-based Woo, who started his career as an economist at the IMF and has a doctorate in economics from Columbia University, doesn’t shy away from bold calls. In June, he called China’s equity rally the world’s largest bubble since the dot-com boom of the late 1990s. Shanghai stocks fell as much as 43 percent from their June 12 peak.
Woo’s view on the yuan contrasts with that of Zhu Haibin, JPMorgan Chase & Co.’s chief China economist, who dismissed forecasts for a quick slide in the currency after SDR entry as a conspiracy theory. Zhu said last week such a move would increase volatility in financial markets and harm the economy. JPMorgan is the biggest U.S. bank and Bank of America ranks second.
China has accelerated the opening up of its capital account in recent months to meet the IMF’s criteria for SDR selection. Entry into the basket would bolster the yuan’s status as one of the world’s major currencies, helping it challenge the dollar’s supremacy in global trade and investment. Standard Chartered Plc estimates SDR inclusion will spur as much as 7 trillion yuan ($1.1 trillion) of flows into China.
Gross domestic product increased in the third quarter by the least in six years and October trade data released Sunday showed imports slid for the 12th month in a row and exports shrank 6.9 percent in dollar terms, a bigger decline than was estimated by all 31 economists in a Bloomberg survey. The nation’s foreign-exchange reserves have dropped by more than $300 billion this year to $3.53 trillion and an October increase of $11.4 billion was the first gain in six months.
The threat of quicker outflows will not stop the PBOC from letting the yuan drop as these outflows have been mostly driven by repayment of corporate foreign debt, "a big part" of which has been done, said Woo.
"China is no longer able to have its cake and eat it too," he said. "Letting the renminbi go is a necessary condition for China to ease monetary policy."