Yuan Advances as PBOC Seen Allowing Market Forces Greater Sway

Updated on
  • Central bank follows dollar moves to set onshore fixing
  • China to guide yuan lower after stability: Goldman Sachs

The yuan rose for the first time in three days amid optimism that China’s central bank is allowing market forces greater sway after sparking turmoil earlier this year with a series of surprise fixings.

The monetary authority has followed the direction of the dollar’s move in setting the yuan’s reference rate this week, and allowed its currency to surge the most in a decade when onshore markets reopened after the Lunar New Year holidays. Bearish forecasts on the yuan are beginning to see a slight reduction in pessimism, with analysts projecting a 3.4 percent decline by year-end, compared with 4.2 percent two weeks ago.

The yuan strengthened 0.18 percent to 6.5173 a dollar as of 4:43 p.m. in Shanghai, according to China Foreign Exchange Trade System prices. The currency’s Hong Kong rate was 0.08 percent weaker than the onshore level, after sinking last month to a record 2.9 percent discount as global investors bet on depreciation. The People’s Bank of China raised its reference rate by 0.13 percent on Thursday after a gauge of dollar strength retreated.

“The spread between the onshore and offshore yuan has been staying near par, reflecting less bearish sentiment on China," said Ken Cheung, a currency strategist at Mizuho Bank Ltd. in Hong Kong. "This makes the PBOC comfortable enough to allow some manageable fluctuations. As long as China reckons the market has stabilized, it will allow more two-way volatility with reference to a basket of currencies."

Yuan Index

A Bloomberg replica of the CFETS RMB Index, which measures the yuan against 13 currencies, fell for the third day in a row. The official gauge was unveiled in December and the dollar has the largest weighting of 26.4 percent, followed by the euro and the yen with 21.4 percent and 14.7 percent, respectively.

The yuan’s volatility versus the greenback will increase but stay relatively stable against the basket, PBOC Governor Zhou Xiaochuan said in an interview with Caixin magazine published on Saturday. China’s balance of payments position is good, capital outflows are normal and there’s no basis for the exchange rate to depreciate continuously, he said.

Depreciation Expectations

Yuan positions at the People’s Bank of China fell 644.5 billion yuan ($99 billion) in January, the second-biggest decline on record, to 24.2 trillion yuan, according to Bloomberg calculations based on the monetary authority’s balance sheet posted its website Thursday. The drop indicates that the central bank intervened in the currency market to soothe sentiment as expectations for the exchange rate to weaken was strong, Liu Jian, a Shanghai-based researcher at Bank of Communications Co. specializing in cross-border capital flows, wrote in a note Thursday.

After a period of stabilization, policy makers will again probably guide the yuan carefully lower again, said Song Yu, Beijing-based chief China economist at Goldman Sachs Gao Hua Securities Co. He estimated the currency will depreciate to 7 against the dollar by the end of this year and to 7.3 by the end of 2017. Government officials and business leaders will gather in Beijing for the annual National People’s Congress in early March, where delegates will sign off on a new five-year economic plan.

“The stronger fixing shows that the Chinese authorities are focused on allowing two-way fluctuations of the yuan and are more focused on the basket,” said Khoon Goh, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “The basket contains a number of oil-linked currencies such as the ruble and ringgit and so the authorities will have to adjust accordingly.”

— With assistance by Tian Chen

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