Offshore Yuan Drops on Stimulus Bets as Growth Misses Estimates

  • China's GDP rose 6.8% in fourth quarter, least since 2009
  • Barclays, OCBC see further PBOC easing to support growth

The offshore yuan fell as the slowest economic growth since 2009 fueled speculation China will loosen monetary policy further.

Gross domestic product expanded 6.8 percent from a year earlier in the fourth quarter, less than the median estimate of 6.9 percent in a Bloomberg survey, according to data released Tuesday. The People’s Bank of China could reduce lenders’ reserve-requirement ratios twice and cut benchmark interest rates by a total of 50 basis points in the first half of 2016 to support the economy, Barclays Plc economists led by Chang Jian wrote in a note on Tuesday.

"I wouldn’t say the fundamentals are strong, because problems such as excessive capacity will likely weigh down growth prospects this year," said Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp. "The PBOC will cut interest rates once and banks’ reserve-requirement ratios multiple times this year to stimulate the economy."

The yuan traded in Hong Kong dropped 0.21 percent to 6.5986 a dollar as of 4:53 p.m. local time, data compiled by Bloomberg show. The onshore currency in Shanghai was steady at 6.5790, according to China Foreign Exchange Trade System prices. The monetary authority set its reference rate at 6.5596.

’Bumpy Landing’

China’s GDP expanded by 6.9 percent last year, the slowest annual expansion in a quarter century. The economy lost momentum even as the PBOC cut benchmark interest rates six times since November 2014 and relaxed banks’ reserve requirements. The nation’s imports dropped for a 14th month in December, and its producer price index extended a record stretch of declines to 46 months, official data show.

China’s economy will grow by 6.3 percent and have a "bumpy landing" this year, Zhou Hao, an economist at Commerzbank AG in Singapore, wrote in a note on Tuesday. The PBOC will likely reduce interest rates and banks’ reserve-requirement ratios in the coming months, he wrote.

PBOC Curbs

The slowdown complicates Premier Li Keqiang’s aims of stabilizing the exchange rate to reduce cash outflows and liberalizing its capital account to bolster the yuan’s global use. The PBOC has been attacking yuan bears on multiple fronts, from driving up offshore interest rates to undertaking intervention that cut the nation’s foreign-exchange reserves by an unprecedented $108 billion last month.

The central bank said Monday that it will impose reserve-requirement ratios on yuan deposited onshore by overseas financial institutions from Jan. 25. The ratios will be the same as are applied to mainland banks, currently 17.5 percent for major lenders, according to people familiar with the matter.

"In the short-term, the measures may help to stabilize the offshore yuan at around 6.60 a dollar, and there will probably be some calm and stability until after the Lunar New Year," said Koon How Heng, a foreign-exchange strategist at Credit Suisse AG’s private banking and wealth management unit in Singapore. "But this will come at a cost as the offshore yuan trading liquidity dries up as a result of the elevated funding rate. And it does not solve the underlying problem of growth slowdown in China and the prevailing negative drivers for the currency."

— With assistance by Tian Chen

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