Yuan Declines to Five-Year Low as Concern Over Outflows Deepens

  • China’s currency extends decline of 1 percent over last month
  • Offshore yuan weakens after MSCI rejects China shares

China’s yuan weakened to a five-year low, weighed down by signs of a slowing economy and concern that capital outflows may accelerate.

The currency fell 0.19 percent to 6.5966 per dollar by the close on Tuesday in Shanghai, according to quotes from China Foreign Exchange Trading System. That’s the lowest for the yuan since February 2011 and extending its drop over the past month to 1 percent. The decline came before MSCI Inc. decided against including mainland shares in benchmark indexes. The offshore yuan weakened to as low as 6.6155 after the announcement, the lowest since February, before paring declines.

While the yuan’s losses have so far failed to ignite the volatility that swept global markets in August and January, Goldman Sachs Group Inc. strategists said June 2 that they shifted to an “outright negative view" on the currency and there’s a renewed risk of capital flight.

“We see a good chance that markets will again speculate over the need for a one-off devaluation, even if the message from policy makers has been that this is not on the cards,” the Goldman Sachs strategists wrote.

MSCI Decision

China’s foreign-exchange reserves slipped to the lowest level since late 2011 last month as a rallying dollar ate into the value of the holdings. While reserves have been generally steady this year, halting the steep decline of 2015, May’s tally extended the decline to 20 percent from the near $4 trillion peak in June 2014.

Inclusion by MSCI would have spurred initial inflows of as much as as $30 billion, HSBC Holdings Plc estimated. The index compiler cited the need for additional improvements in the accessibility of the A-share market for the decision, according to a statement on Tuesday. MSCI, whose emerging-market index is tracked by investors with $1.5 trillion in assets, said it will reconsider inclusion in its 2017 market classification review, while not ruling out an earlier announcement.

A record 243 percent surge in China’s shipments from Hong Kong last month suggests outflows are continuing via the over-invoicing of imports, according to Scotiabank, Natixis SA and Royal Bank of Canada.

Manufacturing gauges released this month showed activity remained subdued in May, after April economic data trailed estimates.

Global Volatility

China’s foreign-exchange management has been complicated by a surge in global currency volatility since late May as traders weigh the outlook for Federal Reserve interest-rate increases and the possibility that the U.K. will vote to leave the European Union. Fed funds futures show an 16 percent chance that the central bank will increase borrowing costs in July.

The greenback’s slump in the three months through April had given the PBOC the best of both worlds: a yuan that rose against the dollar but fell versus a basket of peers, a combination that stabilized outflows while aiding exporters. Since then, China’s currency has weakened against both the dollar and the basket.

— With assistance by Tian Chen, and Ye Xie

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