Offshore Yuan Advances as PBOC Bolsters Fixing on Weaker Dollar

  • With IMF done, it's time to focus on fundamentals: analyst
  • Value must be decided by market, says vice finance minister

China’s yuan strengthened in offshore trading, with the central bank boosting the currency’s reference rate for the first time in five days after the dollar declined on speculation the Federal Reserve will take a gradual approach to raising interest rates.

The yuan fell the most in almost a month on Tuesday on concern China will reduce its support for the currency after winning reserve status at the International Monetary Fund. The inclusion, announced on Monday, doesn’t mean the end of financial reforms and the yuan’s value must be decided by the market, Chinese Vice Finance Minister Zhu Guangyao said in Washington.

"It’s time to focus on the fundamentals as the yuan is now officially endorsed as a global reserve currency," said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong. "A slower pace of raising interest rates in the U.S. means smaller capital outflow pressure for emerging markets, including China. That helped the rebound in the yuan today."

The yuan traded in Hong Kong climbed 0.12 percent to 6.4410 a dollar as of 5:04 p.m. local time, according to data compiled by Bloomberg. In Shanghai, the currency was little changed and closed at 6.3988, China Foreign Exchange Trade System prices show. The People’s Bank of China raised its daily fixing, which limits the spot rate’s moves to a maximum 2 percent on either side, by 0.02 percent to 6.3958.

Stubborn Slowdown

The Chinese economy is showing signs of a stubborn slowdown that has resisted six interest-rate cuts since November 2014. A gauge of manufacturing activity slipped to the weakest in more than three years last month, with output, new orders, inventories and employment all declining from October.

"The room for yuan appreciation is limited as China’s economic fundamentals remain weak," said Lai. "Unless there’s substantial improvement in the macro data, the yuan is still under depreciation pressure."

In the latest IMF staff paper dated Nov. 13, the fund cited market reports suggesting Chinese authorities’ intervention in the currency market is a common occurrence. While the re-emergence of a sizable offshore-onshore gap could make operations for SDR users more challenging, the impact can be mitigated by wider access to onshore markets, the paper said.

The long-term goal is for very few interventions, PBOC Deputy Governor Yi Gang said at a briefing on Tuesday, adding that bigger two-way fluctuations are normal. He also said there’s no need to worry about yuan depreciation.

While the odds of a Fed rate increase this month remain above 70 percent, data Tuesday showed U.S. manufacturing shrank at the fastest pace since 2009.

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