Offshore Yuan Posts Strongest Quarter Since 2011 on PBOC Support

Updated on
  • China has sent signals against devaluation, StanChart says
  • S&P cut nation's credit rating outlook to negative from stable

The offshore yuan headed for the strongest quarterly performance in more than four years as Chinese policy makers talked up the currency, intervened in the market and choked the supply of cash to burn speculators.

The intensified efforts have begun to show results, with banks including JPMorgan Chase & Co. and China International Capital Corp. raising their year-end forecasts for the yuan. Stratton Street Capital, whose flagship bond fund has beaten 99 percent of 14,000 fixed-income funds tracked by Bloomberg worldwide, said it expects the currency to be supported by the nation’s current-account surplus, the central bank’s efforts to burn bearish speculators as well as foreign inflows into the nation’s increasingly open bond market.

The offshore yuan strengthened 0.11 percent to 6.4693 a dollar as of 5:28 p.m. in Hong Kong on Thursday, extending its gain for the quarter to 1.53 percent. That’s the most since the three months through December 2011. The yuan in Shanghai advanced 0.46 percent, the first gain in four quarters, to 6.4637.

“Sentiment has improved significantly in the past two months, as the central bank sent strong signals that China won’t devalue the yuan and the dollar weakened," said Eddie Cheung, a Hong Kong-based currency strategist at Standard Chartered Plc. "Capital outflows will most likely ease in the second quarter, which supports the yuan, as China favors inflows over outflows in the near term."

A Bloomberg replica of the CFETS RMB Index, which was unveiled in December and tracks the yuan against 13 exchange rates, fell 2.8 percent in the first quarter, suggesting the Chinese currency depreciated on a trade-weighted basis. The gauge dropped below 98 for the first time since November 2014 on Wednesday before returning above that mark on Thursday.

Outlook Cut

Standard & Poor’s lowered the outlook for China’s credit rating to negative from stable on Thursday, saying the nation’s economic rebalancing is likely to proceed more slowly than the grader had expected. The move came after Moody’s Investors Service cut the nation’s outlook earlier this month.

"They are just reiterating the potential risks that we already know, so there’s nothing new," said Tommy Xie, Singapore-based economist at Oversea-Chinese Banking Corp. "It seems like S&P are playing catch up and I doubt we will see any significant impact on markets."

There’s no basis for continued depreciation of the yuan because the balance of payments is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies, People’s Bank of China Governor Zhou Xiaochuan was cited as saying in a Caixin magazine interview last month. He dismissed speculation that China plans to tighten capital controls and said there’s no need to worry about a short-term decline in foreign-exchange reserves.

Year-End Forecasts

JPMorgan lifted its year-end forecast for the onshore yuan to 6.75 a dollar from the previous 6.90, while CICC raised its prediction to 6.76 from 6.87. The yuan will end the year at 6.75, according to the median estimate in a Bloomberg survey of 42 economists. Many see depreciation as inevitable as funds leave the nation amid monetary easing and the slowest growth in 25 years. Bloomberg Intelligence estimates that $1 trillion of capital left the nation last year.

China’s economy has shown early signs of stabilization. The nation’s industrial profits broke a seven-month losing streak to climb in the January-February period, while consumer inflation accelerated the most since mid-2014 last month. The official factory gauge will probably increase from the weakest level since 2009 in March, according to the median forecast in a Bloomberg survey.

"There are signs of improvement in fundamental pictures in March, so there is no urgency for China to lower the CFETS RMB Index more,” said OCBC’s Xie. He added that the PBOC raised its fixing more than expected on Thursday, probably to lift the basket above 98. “The index has depreciated 3 percent so far this year, a scope that is probably at the edge of the policy makers’ pledge to keep the currency ‘basically stable’ against the basket."

Money Markets

The PBOC increased offering of reverse-repurchase agreements on Thursday after the benchmark money rate climbed by the most in eight weeks. The central bank auctioned 100 billion yuan ($15.5 billion) of seven-day contracts, bringing this week’s total to 255 billion yuan, versus 350 billion yuan due that will drain funds from the financial system.

The seven-day repo rate, a gauge of interbank funding availability, fell eight basis points to 2.34 percent, according to weighted average prices from the National Interbank Funding Center. That’s the biggest decline since Feb. 6. The benchmark money rate rose two basis points this quarter.

“Interbank liquidity is still relatively tight,” said Yan Yan, a Shanghai-based analyst at China Guangfa Bank Co. “The PBOC obviously doesn’t want the market to be awash with cash that could further fuel leverage. At the same time, it doesn’t want to tighten too much all of a sudden.”

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, fell two basis points from the end of last year and was little changed at 2.31 percent, according to data compiled by Bloomberg. The yield on government notes due January 2026 rose one basis point on Thursday to 2.86 percent. The yield on benchmark 10-year sovereign bond rose two basis points this quarter to 2.84 percent, ChinaBond data show.

— With assistance by Tian Chen, and Helen Sun

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