Chinese Officials Push Back Against Yuan Devaluation Concerns

Are the Concerns About China Overdone?
  • Forecasts yuan will drop rapidly are `ridiculous': official
  • PBOC's Ma says investors misunderstood intentions on fixing

Chinese officials pushed back against views the nation’s currency is on a one-way weakening path.

QuickTake The People’s Currency

Betting against the yuan will fail and calls for a large depreciation are “ridiculous” as policy makers are determined to ensure the currency’s stability, Han Jun, the deputy director of China’s office of the central leading group for financial and economic affairs, said at a briefing in New York on Monday.

“It is pure imagination that the Chinese yuan will act like a wild horse without any rein,” said Han, adding that short selling the yuan “will not succeed.”

Investors misunderstood the People’s Bank of China’s intentions in its recent moves on the yuan’s daily reference rate against the dollar, Ma Jun, chief economist at the PBOC’s research bureau, said in comments posted Monday on the central bank’s website. The fixings are based on the previous day’s closing price and changes to the basket of currencies against which the yuan is valued, Ma said.

The comments suggest policy makers are moving to damp expectations of a continued rapid deprecation in the yuan after the currency slumped to a five-year low against the dollar amid rampant capital outflows. Interbank yuan lending rates more than doubled in Hong Kong Monday to records and the exchange rate surged the most in four months overseas amid suspected intervention by China’s central bank.

The yuan’s decline last week and the selloff in Chinese stocks have roiled global markets, helping send the Standard & Poor’s 500 Index to its worst-ever start to a year in data going back to 1928.

Forecasts that the yuan will fall about 14 percent toward 7.6 a dollar as some analysts suggest are not realistic and a decline of that magnitude is “impossible,” Han said at the briefing at the Chinese consulate to the U.S. He confirmed that the central bank intervened in the overseas currency market over the last two days to bolster the yuan.

The comments come as investors including Pacific Investment Management Co. bet the dollar will extend its rally against the yuan.

“We believe the bullish trend of the U.S. dollar will remain intact and that the changes made to the Chinese currency regime portend additional scope for the yuan to weaken over the next six to 12 months,” Luke Spajic, a portfolio manager for Pimco, said in a report. “We are positioned for a stronger U.S. dollar against the yuan and a basket of other Asian emerging-market currencies.”

L-Shaped Recovery

In a discussion that ranged from the accuracy of Chinese statistics to the country’s reform agenda, Han warned that China’s growth hasn’t hit the bottom yet as the government focuses on reducing overcapacity and cutting corporate debt.

Han, who was involved in drafting the government’s five-year economic planning, said the government will refrain from “strong” economic stimulus because its focus is on shifting the $10 trillion economy to a more sustainable growth model. Investors should expect “a long period” with an L-shaped growth path, instead of a faster U- or V-shaped recovery, he said.

While the government targets an average economic expansion rate of 6.5 percent by 2020, it is “acceptable” for growth to dip below that level in some quarters, he said. China’s potential is still promising because there’s a large need for consumption, investment in infrastructure and urbanization, he said.

Stable Currency

As China shifts its growth model away from exports, Han reiterated that policy makers will not intentionally weaken the yuan to “gain unfair competitive advantage.”

The government intends to keep the yuan relatively stable against a basket of currencies, rather than pegging it against the dollar, he said. While two-way volatility in the exchange rate will become the new norm, the PBOC will step in when the fluctuations deviate from China’s economic fundamentals.

Speaking at the same event, Liu Peilin, a senior research fellow at Development Research Center of the State Council, said China’s unemployment rate will rise because job losses in industries with excessive production outpace those created in the service sector. The government will focus on job training and strengthening the social welfare system to help the jobless, he said, while the decline in the working-age population also helps alleviate upward pressure on the jobless rate.

Yuan Fixing

PBOC researcher Ma’s remarks suggest the central bank is trying to correct the impression that China intentionally weakened the yuan by setting the fixing lower last week. Instead, downward pressure on the yuan will ease after investors absorb a shift to valuing it versus a basket of currencies and away from linking it to the dollar, Ma said.

“Some of the market participants recently tried to determine the PBOC’s intentions by looking at the change in the fixing rate versus the previous day,” Ma was quoted as saying. “This is a misunderstanding. The fixing is determined by factors including the closing price of the previous day and the changes of the currency basket. Market participants should look at the differences between fixing and the closing prices, and the changes of the currency basket.”

The yuan shouldn’t be pegged to the U.S. currency and its rate will be more tied to a basket of currencies in the future, Ma said. At the same time, the PBOC will “appropriately limit” daily yuan-dollar volatility, he said.