Yuan Forwards Drop to Six-Month Low on Growth, Default Concerns

Yuan forwards fell to a six-month low on signs the central bank is seeking to weaken the currency at a time of slowing growth and mounting credit concerns in the world’s second-largest economy.

The People’s Bank of China cut its daily reference rate by 0.03 percent to 6.1343 per dollar, the lowest since Dec. 3. Jilin Province Trust Co., which missed five interest payments on a trust product it issued to finance mining projects, declined to comment on a sixth payment due yesterday. China had its first onshore bond default last week when Shanghai Chaori Solar Energy Science & Technology Co. failed to make an interest payment and Baoding Tianwei Baobian Electric Co.’s notes were suspended from trading yesterday after it lost money for a second year.

“China’s economic outlook has deteriorated and more bond defaults could be coming, so it’s weighing on the yuan,” said Bruce Yam, a currency strategist at Sun Hung Kai Forex in Hong Kong. “A weaker yuan could help some exporters, especially the small- to medium-sized ones. It will also facilitate meeting China’s growth target this year.”

Twelve-month non-deliverable forwards dropped 0.33 percent to 6.2055 per dollar as of 4:54 p.m. in Hong Kong, according to data compiled by Bloomberg. The contracts touched 6.2165, the weakest level since Sept. 12, and were trading at a 0.97 percent discount to the Shanghai spot rate.

The onshore yuan dropped 0.08 percent to 6.1450 per dollar at the close in Shanghai, according to China Foreign Exchange Trade System prices. It has lost 0.4 percent in four days and 1.5 percent this year. The spot rate was 0.17 percent weaker than the fixing, within the maximum allowed divergence of 1 percent.

‘Normal’ Fluctuation

Premier Li Keqiang has set a 7.5 percent economic growth target for China this year, a pace of expansion that would be the slowest since 1990. Exports fell 18.1 percent in February from a year earlier, the biggest drop since 2009, data showed March 8. Analysts surveyed by Bloomberg had predicted a 7.5 percent increase.

The yuan’s fluctuations are “normal” and China’s economic data in the first two months were within a “reasonable” range with stable fundamentals, China Central Television reported yesterday, citing PBOC Governor Zhou Xiaochuan. Interest-rate liberalization can be realized in one to two years, Zhou said at a press conference separately.

In Hong Kong’s offshore trading, the yuan slipped 0.16 percent to 6.1455 per dollar, data compiled by Bloomberg show. That was the weakest level since June.

One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, jumped 37 basis points, or 0.37 percentage point, to 2.36 percent, according to data compiled by Bloomberg. A similar gauge for the offshore spot rate rose 11 basis points to 3.22 percent.

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