Photographer: Tomohiro Ohsumi/Bloomberg

Yuan Declines Most in a Week as Data Reignite Economy Concerns

  • Currency facing depreciation pressure in medium term: DBS
  • Broadest measure of new credit grew the least in two years

China’s yuan declined the most in a week and sovereign bond yields were near a decade-low as weaker-than-expected data reignited concern over growth in Asia’s largest economy.

The currency dropped 0.11 percent to 6.6405 a dollar as of 5:08 p.m. in Shanghai, paring a decline of 0.24 percent earlier, according to prices from the China Foreign Exchange Trade System. The offshore yuan rose by 0.04 percent, as a gauge of the dollar’s strength declined for a second day. The People’s Bank of China strengthened its daily reference rate by 0.17 percent.

China’s broadest measure of new credit grew the least in two years in July, while industrial production and investments weakened as well, adding to signs that a stabilization in economic growth may be faltering. Yuan positions on the central bank’s balance sheet declined 190.5 billion yuan ($28.6 billion) in July to 23.4 trillion yuan, data released on Sunday showed. That was the biggest drop since February.

“The economy shows no signs of improvement,” said Nathan Chow, an economist at DBS Group Holdings Ltd. in Hong Kong. “Friday’s data almost all missed estimates, and slowing investments, especially slumping investments in the private sector, are very concerning. This signals the yuan is facing depreciation pressure in the medium to long term.”

Money Markets

The benchmark 10-year government yield fell one basis point to 2.65 percent, according to National Interbank Funding Center prices. The yield on the similar-maturity benchmark fell to 2.67 percent on Friday, the lowest since Bloomberg started compiling ChinaBond data in 2006.

“The disappointing data set raised concern about China’s growth quality as well as whether Chinese growth is still in the first stage of an L-shaped trajectory,” Oversea-Chinese Banking Corp. analysts led by Tommy Xie wrote in a report on Monday. The authorities are caught in a dilemma between stimulating growth and containing an asset bubble, they said.

After its recent declines, the yuan “remains broadly in line with fundamentals,” the International Monetary Fund said in a report released on Friday. Achieving an effective float within the next couple of years, ideally by 2018, remains a key goal, while capital account liberalization needs to take a cautious approach, following progress on exchange-rate flexibility and financial sector reforms, the IMF said.

China will continue with bond market reforms, PBOC Deputy Governor Yi Gang said at a briefing on Monday. The first batch of Special Drawing Rights bonds will be issued on the Chinese interbank market before the Sept. 4-5 Group of 20 Summit in the eastern city of Hangzhou, he said. The yuan will officially enter the IMF’s basket of global reserves in October. Yi added that the yuan’s internationalization is a market-driven process, and that the currency’s development has surpassed the expectations for many.

The official trade-weighted CFETS RMB Index, which measures the yuan against 13 currencies, fell 0.24 points to 94.49 last week. A Bloomberg replica of the gauge rose 0.15 percent, the most in three weeks, to 94.63 on Monday.

— With assistance by Helen Sun

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