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The yuan recorded its biggest weekly drop since an August devaluation on speculation China’s central bank is taking advantage of a stronger dollar to allow a decline before the U.S. raises interest rates.
The yuan dropped 0.27 percent on Friday to close at 6.4553 versus the greenback in Shanghai, China Foreign Exchange Trade System prices show. That takes its five-day retreat to 0.83 percent, the most since the week of the currency’s Aug. 11 devaluation. The dollar has risen against 10 of the world’s 16 major exchange rates since Dec. 4, with odds slanted toward the Federal Reserve Open Market Committee tightening monetary policy next week.
The People’s Bank of China cut the yuan’s daily reference rate by 0.8 percent this week, the most since it devalued the currency in August and made the fixing mechanism more market-oriented. The central bank has periodically been seen propping up the yuan in Shanghai and Hong Kong by selling dollars. There isn’t any basis for long-term depreciation, Wang Yungui, a director at the State Administration of Foreign Exchange, said at a regular briefing in Beijing on Thursday.
“We haven’t seen any decisive intervention this week and investors take that as the PBOC allowing a weaker currency,” said Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp. “That said, they may come back in after next week’s FOMC meeting as there’ll be a better picture on the U.S. interest-rate outlook."
The PBOC has lowered its daily yuan fixing on seven of nine trading days since winning reserve-currency status at the International Monetary Fund on Nov. 30. The onshore spot rate is allowed to trade a maximum 2 percent on either side of the reference rate.
In Hong Kong’s offshore market, the yuan declined 0.11 percent to 6.5347 a dollar as of 6:11 p.m. local time, extending this week’s drop to 1.35 percent, according to data compiled by Bloomberg. The offshore currency’s spread to the onshore rate widened to an average 805 pips this week, from 447 pips in the previous five days.
China’s foreign-exchange reserves fell $87 billion in November, more than the $33 billion forecast and a sign the central bank was supporting the yuan. The stockpile slumped by a record $94 billion in August.
The PBOC on Friday released guidelines on free trade zones in the provinces of Guangdong and Fujian as well as Tianjin city, granting companies registered in the area up to $10 million in capital-account convertibility quotas. In the Guangdong zone, individuals can borrow yuan funds from Hong Kong and Macau for property purchases within the area, the central bank said.