Yuan Drops to 10-Week Low After PBOC Official Calls for Reform

Updated on
  • Opening of capital account should be sped up: PBOC official
  • Market is testing PBOC's resolve to support yuan: OCBC

The yuan fell to a 10-week low after a central bank official said China should accelerate the opening of its capital account, spurring speculation there will be less intervention once it wins reserve currency status.

Speeding up yuan convertibility under the financial and capital accounts is important in getting the currency ready for greater global usage, Caixin magazine reported Tuesday, citing Zhou Chengjun, an official at the People’s Bank of China’s monetary policy department. The authority’s holdings of U.S. Treasuries have fallen to the lowest level since February as China used its foreign-exchange reserves to support the yuan amid efforts to be added to the International Monetary Fund’s Special Drawing Rights.

The onshore yuan, which is allowed to diverge a maximum 2 percent from the central bank’s daily fixing, dropped 0.1 percent to close at 6.3849 in Shanghai, according to China Foreign Exchange Trade System prices. It fell to 6.3857 earlier, the weakest level since Sept. 10. The currency has declined 1.1 percent this month as a gauge of dollar strength rose 2 percent.

"The market is testing if the PBOC will tolerate a weaker yuan now that there’s very little uncertainty left with the SDR bid and the dollar is strengthening," said Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp. "A more open capital account will pressure the yuan lower in the short run due to China’s weak fundamentals and the U.S. recovery, but it will also attract inflows in the medium to long term."

Fixing Weakened

IMF Managing Director Christine Lagarde announced late Friday that her staff have recommended the yuan be included in the fund’s SDR, alongside the U.S. dollar, euro, pound and yen. The recommendation makes approval all but certain with the fund’s major shareholders including the U.S. having said they’d support the Chinese currency’s entry so long as it met the requirements.

The yuan’s entry into SDR is "inevitable" and the real issue is whether the currency is allowed to float freely or if there is intervention for political reasons, Alan Greenspan, the former chairman of the Federal Reserve, told a forum in Beijing on Wednesday via a video link from Washington.

The offshore yuan, which trades freely, declined 0.23 percent to 6.4187 a dollar in Hong Kong, according to data compiled by Bloomberg. The PBOC weakened its daily fixing for the onshore currency by 0.09 percent to 6.3796, the lowest since Aug. 31.

The PBOC could lead with policies to achieve the Chinese currency’s “main” or “certain” role in cross-border capital flows, Zhou said, adding that China needs greater connection between onshore and offshore markets and a deep overseas yuan market.

China, the biggest foreign holder of U.S. government debt, had $1.258 trillion in bonds, notes and bills in September, down $12.5 billion from a month earlier, according to Treasury Department data released Tuesday in Washington.

— With assistance by Tian Chen

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