Yuan Weakens as PBOC Cuts Fixing Before China Manufacturing Data

Updated on
  • China is loosening monetary policy as Fed prepares to tighten
  • President Xi Jinping heads to the U.S. for talks this week

The yuan fell the most in almost two weeks as China’s central bank cut its daily reference rate before manufacturing data due Wednesday.

The People’s Bank of China cut the yuan’s fixing by 0.07 percent to the lowest level since Sept. 10. A preliminary Purchasing Managers’ Index is forecast to show factory output is shrinking in September for the seventh month in a row, based on the median estimate in a Bloomberg survey. While weak data bolsters the case for China to add to its five interest-rate cuts of the past year, U.S. monetary policy is headed in the other direction with four Federal Reserve officials having said in recent days that they expect borrowing costs to be raised in 2015.

"A weaker fixing and the Fed members’ comments have pushed the yuan lower today," said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. "China’s economy is still going downhill and fundamentals are quite weak, which will keep pressuring the currency in the medium term."

The onshore yuan in Shanghai, which is allowed to diverge from the PBOC’s reference rate by a maximum 2 percent, fell 0.11 percent to close at 6.3760 a dollar, China Foreign Exchange Trade System prices show. That’s the biggest drop since Sept. 9. The freely-traded offshore yuan was little changed at 6.4063 as of 4:39 p.m. in Hong Kong, according to data compiled by Bloomberg.

Global Push

Chinese President Xi Jinping said attracting foreign investment is a long-term policy and that won’t change, the Wall Street Journal reported Tuesday, citing an interview. The reform of the yuan’s exchange-rate regime will continue in a market-oriented direction, and there’s no basis for sustained depreciation, he was reported as saying.

The PBOC plans to sell short-term yuan-denominated debt in London "in the near future," a move that will promote the global use of the currency, according to a statement following discussions in Beijing between U.K. Chancellor George Osborne and China Vice Premier Ma Kai. The European nation said it supports China’s bid to include the yuan in the International Monetary Fund’s reserve-currency basket.

The PBOC and the Bank of England will also increase the size of bilateral currency swaps, and China will also increase a yuan-denominated investment limit for the U.K. based on market demand, according to the statement. Yuan internationalization may also be on the agenda when Xi visits the U.S. this week.

"The yuan will remain steady in the near-term as China is pressing ahead with internationalizing the currency with help from the U.K., and stability is wanted during President Xi Jinping’s U.S. trip," said Banny Lam, co-head of research at Agricultural Bank of China International Securities in Hong Kong. "The exchange rate in the future will depend more on economic data, which will likely improve in the third quarter as previous easing measures take effect."