Yuan Widening Signals First Drop Since 2009 to Barclays, ANZ

The yuan is poised to weaken against the dollar in 2014 for the first time in five years after China’s central bank doubled the currency’s trading range, according to Bank of America Corp. and Barclays Plc.

At least five banks cut their projections for the yuan following the People’s Bank of China’s March 15 announcement of the band’s widening to 2 percent on either side of a daily fixing. The currency lost 0.9 percent since March 13 to close at 6.1920 per dollar today, the biggest three-day drop since at least 2007. The yuan ended 2013 at 6.0539.

“The market is much less enthusiastic about the yuan now,” Suan Teck Kin, an economist at United Overseas Bank Ltd. in Singapore who lowered his yuan estimate yesterday, said in a phone interview. “The PBOC’s preference for two-way flexibility is clear. The steady appreciation of the currency of the past years may not be repeated anytime soon.”

The band widening fits the PBOC’s goal of discouraging capital inflows from investors who make one-way bets on the yuan and is part of Premier Li Keqiang’s plans to accelerate moves to make the currency more convertible. A decline will also cheapen Chinese exports, which slumped 18.1 percent in February, the biggest decline since 2009.

Barclays, the world’s third-largest foreign-exchange trader, yesterday cut its one-month yuan forecast to 6.20 per dollar from 6.07, and its 12-month estimate to 6.05 from 5.95.

“The opportunity for the currency to trade weaker is now greater” with a broader trading range, Hamish Pepper, a Singapore-based currency strategist at Barclays, said in a phone interview yesterday.

Greater Flexibility

Bank of America lowered its year-end yuan estimate to 6.10 per dollar from 6.0, implying the currency will post the first annual decline since 2009. The greater flexibility under a wider band, potential dollar strength and downgrade of China’s growth outlook prompted the revision, analysts led by Claudio Piron wrote in a March 16 note. Bank of America cut its estimate for China’s 2014 economic growth to 7.2 percent from 7.6 percent on March 13.

Australia & New Zealand Banking Group Ltd. expects the yuan to reach 6.08 per dollar by the end of December, instead of 5.98, according to strategists Khoon Goh and Irene Cheung. Slowing growth in China and in emerging markets has become the main concern for global investors, according to a survey conducted by Barclays. About 84 percent of the 970 investors polled said China’s expansion will be below the official 7.5 percent target.

Volatility Jumps

UOB reduced its year-end yuan forecast to 6.05 per dollar from 6.02. The PBOC may widen the daily trading band to as much as 4 percent in the second half of this year, Suan said. Standard Chartered lowered its end-June forecast to 6.06 from 6.01 and maintained a year-end prediction of 5.92.

China’s currency could weaken to 6.30 per dollar or even lower over the course of this year, according to Deutsche Bank AG, the biggest foreign-exchange trader. The yuan no longer has a high carry and it was “too strong” compared with other emerging-market surplus currencies, Bilal Hafeez, London-based global head of foreign-exchange strategy, wrote in a report dated yesterday.

The yuan has weakened 2.4 percent since reaching a 20-year high of 6.0406 per dollar on Jan. 14. It strengthened 2.9 percent in 2013. One-month implied volatility, which is used to price options, jumped as much as 31 basis points yesterday to 2.75 percent, the highest since September 2012. The gauge was at 2.27 today.

Company Collapses

The yuan’s declines were spurred by the central bank in order to curb one-way bets on its appreciation before the widening of the band, HSBC Holdings Plc strategists led by Paul Mackel in Hong Kong wrote in a March 15 note. The currency may slide toward the lower end of its new trading range because the expansion is an implicit message that the authorities are comfortable with further declines, Brown Brothers Harriman & Co. strategists led by Marc Chandler in New York wrote in a note.

Official data in the past two weeks have shown a slump in factory and consumption, making it harder for some companies to service debt. Zhejiang Xingrun Real Estate Co., a property developer with 3.5 billion yuan ($565 million) of debt doesn’t have enough money to repay creditors and has collapsed, government officials familiar with the matter said yesterday.

Premier Li Keqiang said last week that the government will increase oversight of China’s $6 trillion shadow-banking industry, which includes trust companies and lenders’ wealth-management products, adding that some cases of default are unavoidable. He retained an economic growth target of 7.5 percent for this year, which would be the slowest since 1990.

“There is continued concern over shadow banking and the quality of assets,” said Barclays’s Pepper. “The focus is likely to weigh on sentiment toward China to the extent that it has the potential to detract from growth.”

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