Pimco Foresees Scope for Yuan Decline as China Balances Flows

  • Policy makers to allow greater yuan movement, says Spajic
  • IMF entry will open door to Chinese markets, spur reforms

The yuan has potential to decline over the next year, with China’s post-devaluation policy allowing for greater movement, according to Pacific Investment Management Co.

“Given the changes made to the currency regime in August, there is more scope for the currency to adjust in value (weaken) over the next six to 12 months,” Luke Spajic, an emerging-market money manager at Pimco, wrote in a blog published on Friday. “The further out we look, the more we expect policy makers to allow the yuan to move in order to balance capital flows.”

The central bank forced the yuan to weaken 1.9 percent on Aug. 11, and said that it was shifting to a more market-driven system of setting the currency’s daily reference rate. That commitment has since been questioned, with the People’s Bank of China suspected of regular intervention to prop up its exchange rate.

The yuan will probably remain “reasonably stable” in the next quarter, wrote Singapore-based Spajic at the investment company that oversaw $1.47 trillion as of Sept. 30. The currency’s likely ascent to the International Monetary Fund’s basket of reserves will spur inflows, he said.

Inclusion will be the “key that opens the door to Chinese capital markets," said Spajic, adding that it will also potentially spur more market-related structural reforms, especially in the financial sector.

China’s Reward

The IMF’s executive board is scheduled to meet on Nov. 30 to decide whether it will add the yuan to its Special Drawing Rights alongside the dollar, euro, pound and yen. The fund’s staff last week recommended approval, making the inclusion all but certain as major holders including the U.S. have said they will support the bid as long as the basket’s requirements are met.

“The reward for China will most clearly be seen in flows into the currency from the world’s central banks and sovereign wealth funds, which should alleviate some concerns over the potential for capital outflows," Spajic said.

Capital outflows have abated following the PBOC’s suspected intervention, with a gauge of Chinese financial institutions’ foreign-currency assets rising for the first time in five months in October after a record drop in September. The yuan has declined 2.8 percent against the dollar so far this year.

Chinese equities are likely to enter global emerging-market indexes over the next one to two years, with the nation’s fixed-income market becoming a major part of the global investor toolkit, Spajic wrote.

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