Yuan Drops to Four-Year Low as Share Slump Spurs Outflow Concern

Updated on
  • Report showed industrial profits remain in contraction
  • Economic activity to improve as stimulus kicks in: Goldman

The yuan closed at a four-year low after a slump in Chinese equities reignited concern capital will flow out when the economy is still showing few signs of a solid recovery.

The Shanghai Composite Index fell 2.6 percent in its biggest loss since Nov. 27 as emerging-market stocks halted a two-week rally. China recommenced initial public share offerings this month after banning new sales in June amid a rout that wiped $5 trillion from the value of local equities. A report over the weekend showed that while a contraction in industrial profits slowed, they have fallen for six straight months.

“Apart from the correction in the stock market, liquidity is quite thin at this point on a global market basis," said Suan Teck Kin, an economist at United Overseas Bank Ltd. in Singapore. “Some dollar buying could push up the greenback."

The yuan’s spot rate in Shanghai closed down 0.18 percent at 6.4880 a dollar, the lowest level since May 2011, according to China Foreign Exchange Trade System prices. The People’s Bank of China cut its daily reference rate, which restricts onshore moves to a maximum 2 percent on either side, by 0.06 percent to 6.4750.

The offshore yuan reversed an earlier gain to trade 0.18 percent weaker at 6.5542 a dollar as of 5:45 p.m. in Hong Kong, according to data compiled by Bloomberg. It has declined 5.2 percent this year, more than the 4.3 percent drop in the Shanghai rate.

Yuan trading in Shanghai will be extended to 11:30 p.m. local time from Jan. 4, compared with the current close of 4:30 p.m., the PBOC said in a statement last week. Overseas institutions with significant volumes will also be allowed to trade in the onshore foreign-exchange market.

The decline in industrial profits slowed to 1.4 percent in November, from 4.6 percent the previous month, according to figures issued on Sunday. The PBOC has cut interest rates six times since November 2014 and lowered bank reserve-requirement ratios to boost an economy headed for the slowest annual growth in a quarter century.

The nation’s “activity growth” will improve as the central bank’s easing measures kick in, Goldman Sachs Group Inc. economists led by Maggie Wei wrote in a note.