Yuan Falls This Week as Growth Fears Overshadow IMF Victory

  • Data this week showed home-price recovery slowed in October
  • Goldman, Pimco warn policy makers may let yuan weaken in 2016

The yuan fell this week, bucking gains across Asia, as concerns over China’s economic slowdown overshadowed its imminent entry into the IMF’s basket of reserve currencies.

A report this week showed a recovery in China’s property prices slowed in October amid an oversupply in less prosperous cities, adding to recent signs including a slump in new credit that the economy has yet to turn around. The International Monetary Fund signaled at the end of last week that the yuan is likely to be added to its Special Drawing Rights basket at a Nov. 30 meeting, a milestone that may bolster the currency’s credibility to global investors.

"The market is looking forward to the yuan entering SDR at the end of November but in reality, China’s economic data are still showing downside risks," said Aaron Chan, director of retail sales at ADS Securities Hong Kong Ltd. "Central banks will consider buying yuan assets phase by phase and will also consider whether it’s suitable to buy yuan in the current economic environment."

The yuan fell 0.17 percent this week and 0.02 percent on Friday to 6.3850 a dollar, China Foreign Exchange Trade System prices show. The offshore currency in Hong Kong slipped 0.1 percent from Nov. 13 and 0.04 percent from Thursday to 6.4134. A gauge of Asian currencies gained 0.4 percent this week as the Federal Reserve signaled it will raise rates only gradually beginning from December.

Hibor Rising

The People’s Bank of China has given verbal guidance to onshore banks to stop offering cross-border financing to offshore lenders, according to people familiar with the matter. The authority has also told overseas banks to halt onshore bond repurchases, they said. The measure is seen as an effort to narrow the offshore yuan’s discount to its onshore rate in order to secure the currency’s inclusion into the SDR basket.

The Hong Kong Interbank Offered Rate for seven-day loans jumped 151 basis points to 4.31 percent and that for overnight financing surged 199 basis points to 3.72 percent. Both rates declined for a second day on Friday.

A stronger dollar and slower growth in China may prompt policy makers to allow the Chinese currency to weaken, something that risks having a spillover effect on emerging markets, Goldman Sachs Group Inc. said in a report on Thursday. The yuan has scope to decline over the next 12 months as China allows greater flexibility in its exchange rate following an Aug. 11 devaluation, according to Pacific Investment Management Co.

The mismatch between the yuan’s price at home and abroad means the offshore rate can’t be used as a perfect hedge for onshore exposure, the IMF said in August. The fund’s staff last week recommended the yuan be added to the institution’s Special Drawing Rights basket, alongside the dollar, euro, pound and yen.

— With assistance by Justina Lee, and Tian Chen

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