Yuan Drops on Bets China to Refocus on Growth After IMF Triumph

  • Currency to decline 3-4% in 2016 as PBOC eases: Goldman
  • China to retain managed-float regime, State Council says

The yuan weakened in offshore trading, pressured by speculation that China will refocus its energies on boosting the economy now that the IMF’s reserves-basket decision is out of the way.

The central bank will cut benchmark interest rates by 25 basis points this month, Goldman Sachs Group Inc. strategists wrote in a note on Wednesday. Policy support is essential if China is to achieve its economic expansion target, they said, adding that the yuan’s appreciation will be curbed at the very least. China will continue a “managed floating” exchange-rate regime and keep the yuan at a reasonable and balanced level while pushing for convertibility under the capital account, the State Council said on Wednesday.

The yuan traded in Hong Kong dropped 0.08 percent to 6.4468 a dollar as of 4:44 p.m. local time, according to data compiled by Bloomberg. The currency in Shanghai rose 0.03 percent to close at 6.3972, China Foreign Exchange Trade System prices show. The People’s Bank of China cut its daily fixing, which limits the spot rate’s moves to a maximum 2 percent on either side, by 0.04 percent to 6.3982.

“China’s economy will pressure the yuan weaker in the coming year, yet a large-scale devaluation isn’t likely as the government promotes the currency’s global use," said Banny Lam, co-head of research at Agricultural Bank of China International Securities Ltd. in Hong Kong. “The central bank will continue to reduce bank reserve requirements and interest rates to bolster the economy, which also weakens the yuan.”

Economy Slows

A gauge of manufacturing activity fell to the weakest level in more than three years last month, signaling that the central bank’s six interest-rate cuts since November 2014 have had limited effect and complicating Premier Li Keqiang’s efforts to achieve this year’s economic expansion target of 7 percent. The International Monetary Fund’s decision to include the yuan in its Special Drawing Rights lays the foundation for further financial reforms in China, the 21st Century Business Herald cited IMF deputy managing director Zhu Min as saying in an interview.

The yuan will weaken 3-4 percent next year as capital leaves and economic growth wanes, the Goldman strategists wrote. The PBOC will cut the amount of cash banks need to set aside as reserves by 300 basis points, and reduce benchmark interest rates by 50 basis points next year, they added.

“While we think this possibility of the authorities allowing a one-off (potentially large) depreciation cannot be ruled out, we think it is unlikely to be the preferred option in the near future,” the Goldman strategists said. “Politically, a large depreciation would be awkward when the SDR decision is still fresh in memory and China looks forward to hosting the next G-20 summit in early September 2016.”

— With assistance by Tian Chen

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