Yuan Forwards Drop Most in Two Weeks on Fixing, Dollar Strength

Yuan forwards fell the most in almost two weeks after the central bank cut the currency’s fixing amid sluggish economic expansion and a stronger dollar.

The People’s Bank of China reduced the reference rate by 0.06 percent to 6.1497 per dollar, the weakest since Sept. 9, and the Bloomberg Dollar Spot Index rose to a four-year high. Barclays Plc expects the yuan to drop in coming months after cutting China’s growth forecasts. Almost $10 billion of fraudulent trade was uncovered as part of an investigation begun in April last year, China’s currency regulator said today.

Twelve-month non-deliverable forwards fell 0.18 percent, the most since Sept. 15, to 6.2405 per dollar as of 4:53 p.m. in Hong Kong, according to Bloomberg-compiled data. They were 1.7 percent weaker than Shanghai’s spot rate, which slipped 0.03 percent to close at 6.1363, China Foreign Exchange Trade System prices show.

“Room for yuan appreciation is getting more limited as China’s growth isn’t showing strong recovery signs,” said Stella Lee, president of Success Wealth Management Ltd. in Hong Kong. “The outlook of a stronger dollar will also weigh on the Chinese yuan.”

The government is becoming more willing to accept lower growth, Barclays strategists led by Mitul Kotecha in Singapore wrote in a research note yesterday. The lender revised its 2014 growth forecast for the world’s second-largest economy to 7.2 percent from 7.4 percent.

Fraudulent Trade

Companies “faked, forged and illegally re-used” documents for exports and imports, Wu Ruilin, deputy head of the State Administration of Foreign Exchange’s inspection department, said today. SAFE’s probe “will likely further cool down hot-money inflows and commodity imports could slow as banks will likely conduct more careful checks on documentation,” according to Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd.

In Hong Kong’s offshore market, the yuan declined 0.14 percent to 6.1465 per dollar, according to data compiled by Bloomberg. One-month implied volatility in the onshore yuan, a measure of expected swings used to price options, dropped five basis points, or 0.05 percentage point, to 1.63 percent.

Speculation that central bank Governor Zhou Xiaochuan will retire is resurfacing, with the Wall Street Journal yesterday citing unidentified officials as saying that President and Communist Party chief Xi Jinping is considering replacing him.

With Zhou, 66, past the typical retirement age for senior officials and a Communist Party leadership meeting next month, chatter on his possible exit has escalated. Six of 13 economists in a Bloomberg survey this month cited ex-securities regulator Guo Shuqing, 58, as the most likely successor, while five predicted it would be PBOC Deputy Governor Yi Gang, 56.

“It’s not clear to me what’s the impact of a potential leadership change in the PBOC,” said Lee of Success Wealth Management. “I would assume if Zhou steps down, his successor will still follow the central government’s policy stance.”

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