Yuan Will Slump No Matter What IMF Decides, Daiwa's Lai Says

  • Currency seen weakening 15% by end of 2016, economist says
  • China is seeking reserve status for yuan in IMF review

China’s worsening economy faces an exodus of capital that will drag the yuan lower regardless of whether or not the International Monetary Fund grants the currency reserve status at a coming review, according to Daiwa Capital Markets.

The IMF’s executive board is due to meet this month to decide whether to add the yuan to its Special Drawing Rights basket, which currently comprises dollars, euros, yen and British pounds. While Standard Chartered Plc estimates inclusion could lead to as much as 7 trillion yuan ($1.1 trillion) of inflows over the next five years, Daiwa says the outcome will have little impact on China’s prospects and predicts the currency will slide 15 percent against the dollar by the end of next year.

"The SDR is almost irrelevant because the house is on fire," Kevin Lai, chief economist for Asia excluding Japan at Daiwa, said at a press briefing in Hong Kong on Wednesday. Reserve-currency status is "a small bucket of water 10 miles away" that won’t improve China’s economy, said Lai, who prior to an August devaluation was more bearish on the yuan’s outlook than any of the 40 other analysts in a Bloomberg survey.

China, the world’s second-largest economy, is headed for its slowest pace of annual growth in 25 years and Lai says the nation is still in the early stages of the unwinding of an estimated $3 trillion of carry trades that used borrowed dollars to buy yuan-denominated assets. The nation’s foreign-exchange reserves dropped more than $300 billion this year as the central bank bought yuan to support the exchange rate as capital flowed overseas.

Depreciation Trend

The yuan has weakened 2.4 percent since its surprise devaluation three months ago and traded at 6.3638 per dollar as of 3:22 p.m. in Shanghai. Lai predicts the currency will fall to 7.5 by the end of 2016, while the median estimate of analysts surveyed by Bloomberg is for a more modest retreat to 6.60.

The yuan has "a little over" 50 percent chance of getting reserve-currency status this month because the recent PBOC intervention "won’t score well" for China’s bid, Lai said. Chinese policy makers will have to do a lot more in terms of reforms before the world is willing to own more renminbi, he said, referring to another term for the yuan.

The nation’s gross domestic product is expected to increase 6.9 percent this year, which would mark the smallest gain since 1990, a Bloomberg survey shows. Growth is slowing even after six interest-rate cuts in the past 12 months and trade data over the weekend showed China’s exports fell 6.9 percent from a year earlier in dollar terms in October.

"Yuan devaluation is almost the only choice for China to steer some economic growth," Lai said. "It’s not just to stimulate exports, but it has more to do with allowing the series of monetary easing to be effective.”

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