Photographer: Xaume Olleros/Bloomberg

Yuan Posts Biggest Two-Day Drop in a Month as PBOC Cuts Fixing

  • China will try and stabilize rate before G-20 meet, ANZ says
  • Credit surge intensifies currency depreciation pressure: ING

The yuan posted the biggest two-day decline in more than a month as the central bank’s fixing for the currency tracked an overnight advance in the dollar and official media voiced concern that capital outflows will increase.

Yuan depreciation expectations will accelerate outflows this year, a researcher with the State Information Center wrote in the Shanghai Securities News. This will constrain the use of monetary tools such as cuts to interest rates and bank reserve-requirement ratios, the researcher said. China’s foreign-exchange reserves shrank by $99.5 billion in January, the second-biggest decline on record.

The yuan fell 0.13 percent to to 6.5270 against the greenback as of 4:58 p.m. in Shanghai on Wednesday, according to China Foreign Exchange Trade System prices. That takes its decline for the past two days to 0.5 percent, the most since Jan. 8. The People’s Bank of China cut its reference rate by 0.16 percent to a one-month low of 6.5237, surprising some analysts who had forecast smaller moves ahead of a Group of 20 meeting next week. A gauge of the dollar rose 0.18 percent overnight.

Stability Expectation

“The reference rate was weaker than expected,” said Irene Cheung, a foreign-exchange strategist at Australia & New Zealand Banking Group Ltd., who had predicted a level between 6.51 and 6.52. "But this doesn’t indicate policy makers will push the yuan lower, as they’ll try to stabilize it before the G-20 meeting. Also, sentiment has improved lately as investors are looking forward to new reforms and policies to be announced during the National People’s Congress.”

Government officials and business leaders will gather in Beijing for the annual NPC in early March, where delegates will sign off on a new five-year economic plan. China can keep the yuan’s exchange rate basically stable, a spokesman for the National Development and Reform Commission said at a briefing on Wednesday.

China’s broadest measure of new credit surged to a record in January as a seasonal lending binge coincided with a recovery in property prices, and as companies paid back foreign currency loans amid yuan weakness.

Credit Surge

The data raise expectations of a repeat of the first quarter of 2009, when the PBOC opened the credit spigot for a $4 trillion yuan fiscal package to fend off the global financial crisis, Tim Condon, head of Asian research at ING Groep NV in Singapore, wrote in a note Wednesday. Such levels of credit expansion would intensify pressure for the yuan to decline further, and China will likely cut benchmark interest rates by 50 basis points by mid-year, he said.

The offshore yuan traded in Hong Kong fell 0.14 percent to 6.5285 a dollar, or about 0.02 percent weaker than the rate in Shanghai, according to prices compiled by Bloomberg. The currency swung to a 1 percent premium last week, when onshore Chinese markets were shut for the Lunar New Year holidays.

— With assistance by Tian Chen

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