Offshore Yuan Posts Biggest Weekly Drop Since August on Growth

Updated on
  • Data due Sunday is forecast to show fall in exports, imports
  • The Fed this week flagged possibility of a December liftoff

The yuan in Hong Kong posted the biggest weekly drop since its August devaluation on signs China’s economic growth remains weak and on prospects the U.S. will increase interest rates as early as next month.

Manufacturing in the world’s second-largest economy contracted for a third month in October, official data showed Sunday. Exports probably fell for a fourth month, while imports extended the longest stretch of declines in six years, according to analysts’ estimates in a Bloomberg survey before data due Nov. 8. Federal Reserve Chair Janet Yellen said this week a December rate rise would be a "live possibility" if U.S. economic data continue to point to expansion and firmer prices.

"The yuan faces depreciation pressure considering China’s economic fundamentals," said Irene Cheung, a currency strategist at Australia & New Zealand Banking Group Ltd. in Singapore. "There’s stronger confidence that the U.S. will raise interest rates in December, which has pushed the yuan weaker along with other Asian currencies."

The freely traded yuan dropped 0.8 percent this week to 6.3731 a dollar as of 4:36 p.m. in Hong Kong, data compiled by Bloomberg show. That’s the most since the period ended Aug. 14. It was steady on Friday. The rate in Shanghai, which is allowed to diverge a maximum 2 percent from the central bank’s fixing, fell 0.56 percent from Oct. 30 and slipped 0.1 percent Friday to close at 6.3530, according to China Foreign Exchange Trade System prices.

Growth Target

China is seen becoming less tolerant of divergence between its onshore and offshore exchange rates. The gap between the Hong Kong and Shanghai rates widened to about 260 pips during early trading on Friday, before a sharp appreciation of the offshore yuan at about 10 a.m. caused the spread to shrink to less than 100 pips within 20 minutes.

"China has been explicit in its desire for onshore and offshore yuan convergence," said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong. "Recent episodes of intervention would arise around 400 pips, whereas it appears that 250-300 is enough to prompt intervention now."

The People’s Bank of China, which devalued the yuan on Aug. 11, weakened its daily reference rate for the currency by 0.12 percent on Friday to 6.3459 a dollar.

President Xi Jinping announced an annual growth target of at least 6.5 percent in the next five years, lower than this year’s goal of 7 percent. China will seek to increase the yuan’s convertibility in an orderly manner by 2020 and change the way it manages currency policy, according to the Communist Party’s five-year plan, details of which were announced Tuesday.

China is seeking the inclusion of the yuan in the International Monetary Fund’s basket of reserve currencies and is taking steps to make the currency more freely convertible as part of that bid. The IMF is due to deliver its verdict on the yuan this month.

The nation’s exports probably fell 3.2 percent in dollar terms last month and its imports declined 15 percent, according to economists’ median projections.