Yuan's Forecasters Getting It Wrong as China Jolts Markets

China’s yuan policy has blindsided forecasters once again.

The sudden surge in the last four days -- for the onshore exchange rate, it’s been the steepest gain in more than four months -- pushed the currency beyond levels predicted by even the most optimistic analysts. Market watchers were caught off guard earlier in the year as well, when the yuan confounded expectations by strengthening in the first quarter.

As analysts rush to change estimates, with at least 10 doing so this week, they’re also debating what happened to upend the stability against the dollar that’s persisted for most of the year. Most theories revolve around a change in strategy at the central bank (perhaps to counteract last week’s Moody’s Investors Service downgrade, perhaps to prepare for a Federal Reserve interest-rate increase this month), with last week’s unveiling of a tool to smooth out volatility in the daily fixing seen as evidence of the shift.

“The People’s Bank of China’s motivation is a big question," said Julian Wee, senior market strategist at National Australia Bank Ltd. in Singapore. “The market seems to have decided that there are coded hints of intent to have the yuan appreciate, but we are not so sure. The lack of clarity in general makes the authorities, and their policies, hard to understand and anticipate.”

The yuan will end the year at 6.95 per dollar, according to the median estimate of 18 analysts and traders in a Bloomberg News survey conducted May 31-June 2. That’s compared with a forecast of 7, before the surge of the last four days. The currency traded in Hong Kong’s offshore market tumbled 0.61 percent on Friday, the most since January, to 6.7917 as of 5:53 p.m. local time. The onshore exchange rate fell 0.2 percent to 6.8199.

Outside the survey, UBS Group AG analysts also boosted their view on the yuan, citing tighter controls on capital outflows and a weaker dollar. They expect the exchange to refrain from slipping past 7 per dollar by year-end, compared with a previous call of 7.15. Australia & New Zealand Banking Group Ltd. Wednesday said it is strengthening its year-end forecast to 6.95 from 7.10 because Chinese authorities intend to damp depreciation expectations.

There is little in China’s economic fundamentals to back the recent rally. A private gauge of manufacturing toppled over into contractionary territory in May, adding to recent evidence that the economy’s strong start to 2017 is moderating. The international-investor optimism of early 2017 has tempered as well, with curbs on leverage pushing up the cost of domestic borrowing.

Here Are the Theories Why China May Be Supercharging the Yuan

Sentiment on China took another hit last week, when Moody’s downgraded the nation’s sovereign rating for the first time since 1989. Two days later, a PBOC arm said it is considering tweaking the formula for the yuan’s reference rate -- a change that analysts said would give authorities more control.

“The PBOC doesn’t want the market to be able to predict whether the yuan will be stronger or weaker,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “The change to the fixing shows this, and it will be more difficult to forecast the mid-rate. There are many uncertainties in the near term, with the Federal Reserve likely to tighten monetary policy and political considerations ahead of the Chinese Communist Party congress later this year.”

The participants in the Bloomberg survey included Oversea-Chinese Banking Corp., Scotiabank, Bank of Communications Co., United Overseas Bank Ltd., ICBC International Research Ltd., ING Groep NV, Mizuho Bank Ltd., Minsheng Securities Co., Mizuho Securities Co., JPMorgan Chase & Co., UBS, Malayan Banking Bhd., China Merchants Securities Co. and Commerzbank AG. Four traders and analysts asked not to be identified as they are not allowed to comment on the matter publicly.

— With assistance by Wenwen Zhang, Ran Li, Emma Dai, and Helen Sun