Offshore Yuan Rises From Five-Year Low as PBOC Puzzles Markets

Updated on
PBOC Cuts Yuan Fixing by Most Since August
  • Currency advances after initial plunge on weaker PBOC fixing
  • Foreign-exchange reserves decline by a record $108 billion

The offshore yuan strengthened for the first time this week amid speculation the central bank propped up the exchange rate after setting a weaker fixing that sent it into a tumble.

The currency swung from a 0.3 percent gain to a 0.7 percent loss and back in the space of about 30 minutes, spurring talk of intervention and creating confusion about what the central bank is trying to achieve. The yuan turmoil sent mainland shares into a spiral, forcing an early trading halt for the second day this week.

“China isn’t communicating its policy intentions in a clear manner,” said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong. “It is sending confusing signals to the market. And it’s disappointing that their communication policy is less than transparent.”

The offshore yuan rose as much as 0.4 percent and was up 0.2 percent to 6.6852 a dollar as of 3:44 p.m. in London, according to data compiled by Bloomberg, after reaching the weakest level since September 2010. The spot rate in Shanghai plunged 0.56 percent to 6.5929. The offshore yuan’s discount to the onshore rate reached a record 2.9 percent before the market opened, and narrowed to 1.3 percent after the suspected intervention.

The People’s Bank of China earlier reduced its fixing, which restricts onshore moves to a maximum 2 percent on either side, by 0.51 percent to 6.5646, the weakest since March 2011. The CSI 300 Index of equities plunged 7.2 percent before bourses were halted by circuit breakers in the first half hour of trading.

“We saw aggressive intervention in the offshore yuan market,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “We don’t really understand the rationale behind the market movements in the past few days. Obviously, these movements have reminded us of the market rout last year.”

The PBOC is considering new measures to prevent excessive volatility in the yuan in the short term and will also continue to intervene, according to people familiar with the matter. The steps are aimed at restricting trades arbitraging the gap between the yuan’s rates at home and abroad, and at curbing speculation, the people said.

While China’s defense of the yuan stabilized the currency for almost four months following an Aug. 11 devaluation, the intervention led to the first-ever annual decline in the nation’s foreign-exchange reserves. The stockpile shrank by an unprecedented$108 billion in December to $3.33 trillion, according to official data released Thursday.

“The cost of direct intervention in the currency market is climbing,” said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. “That’s why the central bank is guiding the yuan lower by cutting the fixing. The reserves dropped at a slower pace in November probably because the PBOC propped up the yuan in the forwards and swaps markets.”

Capital Outflows

A total of $508 billion of capital left China in the August-November period, according to a Bloomberg estimate that takes into account funds held in dollars by exporters and direct investment recipients. Exports declined for a fifth straight month in November.

The PBOC has weakened its daily fixing by 2.57 percent since winning entry into the International Monetary Fund’s reserves basket on Nov. 30. The central bank stepped into the currency market on Tuesday to prevent excessive volatility in the exchange rate, according to a person with direct knowledge of the matter. The intervention wasn’t meant to guide the yuan higher or lower, the person said. At least two Chinese lenders were seen selling dollars on Thursday, four traders said.

Depreciation Concern

“The pattern of the fixing has changed to being weaker than or in line with the previous close, which signals a greater willingness to let the yuan depreciate,” said Mirza Baig, head of foreign-exchange and interest-rate strategy at BNP Paribas SA in Singapore. “The reality is that because there’s a lack of transparency in the PBOC’s intentions, the market reads the reversal in the fixing’s pattern as showing willingness to let the yuan depreciate.”

The yuan’s one-month implied volatility, a measure of expected swings used to price options, increased 76 basis points to a four-month high of 7.64 percent in Shanghai, according to data compiled by Bloomberg.

A new yuan index, which is composed of 13 currencies and published by the China Foreign Exchange Trade System, rose to the highest level in two weeks on Dec. 31. CFETS releases the data every Friday.

A new yuan index, which is composed of 13 currencies and published by the China Foreign Exchange Trade System, increased to the highest level in two weeks on December 31. The agency releases the data every Friday.

“There’s room for the yuan to weaken as they shift towards the broader trade-weighted basket,” said Eddie Cheung, a Hong Kong-based currency strategist at Standard Chartered Plc. “The market needs to move away from looking at the bilateral dollar-yuan relationship as we’re near a fairer value environment” with regards to the basket, he said.

— With assistance by Tian Chen

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