- Dollar rally, report of IMF enquiry weigh on Chinese currency
- Exchange rate is becoming more market-driven, analyst says
The offshore yuan posted the biggest weekly decline since January, driven down primarily by dollar strength as well as a media report that suggested the IMF is pressuring China for more transparency on its currency-intervention methods.
A gauge of the greenback rose the most since November as Federal Reserve officials voiced support for higher interest rates. The International Monetary Fund is seeking data on the Chinese central bank’s holdings of forwards and futures, which some analysts say are used to cloak support for the yuan. The Wall Street Journal report prompted speculation policy markers will reduce intervention, said Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp.
“The yuan has been following the dollar closely lately, which indicates the exchange rate has become more market-driven," said Liu Dongliang, a Shenzhen-based senior analyst at China Merchants Bank. “The U.S. will likely raise interest rates twice by the end of this year, which could add some pressure on the yuan. There are no factors that could bolster the case for a stable yuan in the long term, considering China’s economic slowdown, capital outflows and monetary easing."
The offshore yuan dropped 0.93 percent for the week to 6.5250 a dollar as of 4:30 p.m. in Hong Kong, prices compiled by Bloomberg show. The currency traded in Shanghai declined 0.6 percent from March 18 to 6.5135, according to China Foreign Exchange Trade System prices. A Bloomberg replica of the CFETS RMB Index, which China uses to measure the yuan’s performance against 13 currencies, has dropped 2.7 percent so far this year.
The People’s Bank of China weakened its daily reference rate for the yuan by 0.9 percent in the period from March 18, breaking a three-week strengthening run, as the dollar rebounded. Policy makers wouldn’t want to see excessive strength in the exchange rate as the economy slows and capital leaves, according to Commerzbank AG. The yuan is expected to drop 7 percent over the next year, Pacific Investment Management Co. economists wrote in a report.
PBOC Governor Zhou Xiaochuan said this week that Chinese officials want to gradually increase the use of the IMF’s Special Drawing Rights, and that the funding tool can help control risk and reduce volatility. The yuan is set to enter the basket on Oct. 1. The volatility in the yuan’s exchange rate is probably due to the events of last August, PBOC adviser Huang Yiping said at the Boao Forum. The central bank wasn’t thinking about weakening the currency but just trying to allow more market forces in the yuan rate, he added.
The IMF said in an e-mailed statement that it continues to “monitor and discuss China’s foreign currency reserves data and other data, in the course of our normal engagement with the authorities.” In a later e-mailed statement, the fund said that China subscribed to the Special Data Dissemination Standard at the end of 2015 and is disseminating its data accordingly, and that it hasn’t asked for additional information from China.
— With assistance by Tian Chen