Top Yuan Forecasters See Rebound in Asia’s Worst Currency
The yuan is poised to recover from declines that have made it Asia’s worst-performing currency as China seeks to prevent an exodus of capital that would threaten economic growth, according to the most accurate forecasters.
Nomura Holdings Inc., which had the best estimates for the yuan over the past four quarters in data compiled by Bloomberg, predicts a 3.3 percent advance to 6 per dollar by Dec. 31, matching the median projection of analysts surveyed by Bloomberg. Japan’s biggest brokerage said the People’s Bank of China engineered the yuan’s 2.3 percent loss since the start of 2014 to help curb speculative bets on appreciation. Second-ranked Scotiabank forecasts a year-end exchange rate of 5.98.
“The last thing they want to do is create an environment where the market sees the yuan is going to depreciate over the medium term,” Craig Chan, Nomura’s Singapore-based head of currency strategy for Asia ex-Japan, said in an April 4 phone interview. “Capital flight could be very large and destabilizing for the domestic market.”
China is trying to ward off speculators as controls on the exchange rate and borrowing costs are loosened in a shift toward a more market-based economy. The yuan has strengthened 33 percent since a dollar peg ended in July 2005, trailing only the Singapore dollar among 24 emerging-market currencies tracked by Bloomberg, and expectations of one-way moves in the currency spurred bets on continued gains.
The reversal in the first quarter hurt holders of offshore yuan structured products known as Target Redemption Forwards. Morgan Stanley estimated last month that there were some $150 billion of the contracts outstanding, held mainly by Chinese companies, and these were losing about $3.5 billion at an exchange rate of 6.20 per dollar. A slide to 6.38 would increase the losses to $7.5 billion, the U.S. bank said.
The currency rose 0.25 percent today, the most since March 24, to close at 6.1968 per dollar in Shanghai, according to China Foreign Exchange Trading System prices. The offshore yuan in Hong Kong climbed 0.28 percent, the biggest gain in a month. Bloomberg graded forecasters based on margin of error, timing and directional accuracy in each quarter, with the final ranking coming from the time-weighted average of the four quarterly scores.
The central bank reiterated last week that it plans to keep the yuan “basically stable,” saying it will closely monitor capital flows. It doubled the currency’s permitted divergence from a daily reference rate to 2 percent on March 17 and has since cut the fixing by 0.3 percent. The spot rate was 0.9 percent weaker than the reference rate today.
“The most significant part of the move is done and 6.30 isn’t on the cards in my view,” said Sacha Tihanyi, senior currency strategist at Scotiabank in Hong Kong. “Fundamentally, China’s capital account is still going to be in surplus, unless we see a significant amount of hot money outflows. If that’s the case, I will be forced to revisit my forecasts.”
Yuan positions at Chinese financial institutions accumulated from foreign-exchange sales, a barometer of capital flows, rose by 128.2 billion yuan ($21 billion) in February, the smallest gain since September, official data show. Increases are a sign of inflows and the latest change followed a decline in exports for February, as well as slowdowns in industrial production and retail sales in the first two months of 2014.
The Chinese currency has had greater price swings this year after the central bank said it will allow more two-way fluctuations. One-month implied volatility, a gauge of expected exchange-rate moves used to price options, rose eight basis points this year to 1.93 percent today. It touched 2.75 percent on March 17.
“Things are no longer as stable as before,” said Tihanyi. “There is more volatility and upside for the dollar versus the yuan. I might have to tweak my interim forecasts a bit, but am still fairly comfortable with the year-end one.”
China’s Purchasing Managers Index for manufacturing was 50.3 in March, higher than the previous month’s 50.2, according to official data on April 1. A reading of 50 signals expansion. A gauge by HSBC Holdings Plc and Markit Economics showed factory output contracted for the third month in a row.
Gross domestic product will expand 7.4 percent this year, the slowest pace since 1990, according to the median estimate in a Bloomberg survey of economists. The World Bank yesterday trimmed its forecast for China’s growth this year to 7.6 percent, from an October projection of 7.7 percent.
The government will roll out measures including railway spending and tax breaks to stabilize growth and create jobs, the State Council, or cabinet, headed by Premier Li Keqiang said in an April 2 statement. While the nation can’t ignore the “difficulties and risks” from increasing downward pressure on the economy, it is confident it can keep growth in a reasonable range, Li said in a separate statement on March 28.
“Hard-landing risks should be somewhat mitigated by easing in monetary policy,” said Nomura’s Chan. His firm sees the PBOC cutting the reserve-requirement ratios of major lenders by a total of 100 basis points to 19 percent this year.
The Bank of England and Germany’s Bundesbank signed agreements with the PBOC last month to enable the clearing and settlement of yuan transactions. The currency was ranked eighth in terms of global payments in February, according to the Society for Worldwide Interbank Financial Telecommunications.
A more flexible and appreciating exchange rate will help achieve China’s goal of transforming its economic growth model to one driven by domestic consumption, Chan said. The currency is “still undervalued” and further gains will also spur demand as policy makers seek to make it a global reserve currency, he said.