Offshore Yuan Drops as Zhou Says No Need for Major Economy Steps

  • Unable to forecast if yuan volatility will end: PBOC Governor
  • Investors expected more support for growth, analyst says

The offshore yuan declined the most in two weeks after China’s central bank governor said major measures weren’t needed to boost growth even as data released over the weekend pointed to a slowing economy.

The currency has returned to a more “normal, rational and fundamentals-driven” trend, Zhou Xiaochuan told reporters on Saturday, adding that excessive monetary stimulus isn’t necessary to achieve the nation’s expansion target of at least 6.5 percent over the next five years. He said also that he’s unable to forecast if the yuan’s volatility will end. The dollar’s 14-day relative-strength index against the offshore yuan neared a level on Friday that indicates to some traders that the greenback will strengthen.

The Chinese currency traded in Hong Kong retreated 0.18 percent, the most since Feb. 16, to 6.4935 a dollar as of 6:42 p.m. local time, prices compiled by Bloomberg show. It rose 0.35 percent on Friday to the strongest level since early December. The yuan in Shanghai was little changed, as was the People’s Bank of China daily fixing, which restricts onshore moves to 2 percent on either side.

“The yuan’s gain on Friday was quite sharp and it’s going through some adjustments now," said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong. "The market was also disappointed by Zhou’s comments as investors were expecting more interest-rate and bank reserve-requirement-ratio cuts to shore up growth because economic fundamentals are quite weak."

Data Miss

The nation’s industrial output climbed 5.4 percent from a year earlier in January and February, the National Bureau of Statistics said Saturday, compared with the 5.6 percent median estimate of economists surveyed by Bloomberg. Retail sales climbed 10.2 percent from a year earlier, missing the 11 percent projected gain, while fixed-asset investment exceeded estimates with a 10.2 percent increase.

The CFETS RMB Index dropped to the lowest level since the gauge was unveiled in December as of Friday, according to data released Monday. This suggests that the yuan is weakening against the basket.

The yield on government bonds due January 2026 was unchanged at 2.86 percent, data from the National Interbank Funding Center show. The seven-day repurchase rate, a gauge of interbank funding availability, fell one basis point to 2.27 percent, according to a weighted average from the National Interbank Funding Center.

In Hong Kong, the one-week yuan interbank rate fell 23 basis points to 1.95 percent, the lowest since May 2014, Treasury Markets Association fixings show. The three-month rate declined 29 basis points to 3.53 percent, the lowest since October, while the one-month dropped 20 basis points to 2.87 percent.

The PBOC’s positions for foreign-exchange purchases fell by 228 billion yuan ($35.1 billion) to 24 trillion yuan last month, according to Bloomberg calculations based on the monetary authority’s balance sheet. That compares with a 644.5 billion yuan decline in January and a 708 billion plunge in December. A gauge measuring the dollar’s strength against its 10 major peers fell the most in 10 months in February.

"Because the dollar was weaker in February, the cost for the PBOC to keep the exchange rate stable was smaller and capital outflows eased," said Liu Dongliang, a Shenzhen-based analyst at China Merchants Bank Co. "But this doesn’t mean the expectation for the yuan to drop further has vanished. The currency will likely weaken and be more volatile as the Federal Reserve may boost interest rates again.

— With assistance by Tian Chen

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