© Reuters. Chinese yuan and US dollar banknotes are shown in this illustration taken on March 10, 2023. REUTERS/Dado Rovic/Illustration
Written by Winnie Zhou and Ray Wei
SHANGHAI/SINGAPORE (Reuters) – The heavily managed Chinese yuan fell to multi-month lows and breached the closely watched $7 level, with analysts expecting the weakness in US Federal Reserve policy to be the biggest driver. Economic vulnerability at home.
The yuan, also referred to as the renminbi, reached 7.0234 per dollar on Thursday, levels last seen in December before the euphoria to reopen China after the COVID-19 pandemic lifted them by a few weeks.
As doubts grow about the strength of the economic recovery, foreign money has left China’s markets and the currency has fallen 4% against the dollar since late January.
Analysts at Nomura and Societe Generale (OTC:) say the yuan may soon head to 7.3, which fell last November. A broader monetary policy divergence between China and the US coupled with lackluster Chinese growth will lead to a weaker yuan, says Kyung Seong, chief Asia macro strategist at Societe Generale.
“An important part of the rally in the dollar’s value against the yuan over the past month has to do with the dollar, so this is not just a renminbi story,” said Alvin Tan, head of Asia currency strategy at RBC Capital Markets in Singapore.
Reflecting this, the trade-weighted basket of CFETS against which the People’s Bank of China (PBOC) manages the currency, fell to 99 from 100 in February.
Meanwhile, as the Fed contemplates whether to pause its tightening after raising interest rates 5 percentage points since March 2022, China appears poised to keep monetary conditions loose amid growing signs that its recovery is losing steam.
In the forwards market, the wide yield differential made the yuan trade stronger, stimulating issuers to shift their profits. The six-month yuan is trading at 6.89.
A Shanghai-based source, who did not wish to be named, said he is holding dollars for the time being, rather than exchanging them for yuan.
“I know I shouldn’t be so greedy, but the yuan will drop to 7.3. I will wait,” he said.
The People’s Bank of China (PBOC) has so far offered little hint that it is uncomfortable with the recent currency moves or has stepped in to defend it. But RBC’s Tan said authorities would be careful not to allow the sale to be accelerated.
“So even if it’s weaker, they’d prefer it to be orderly. And, frankly, it’s been generally orderly so far,” Tan said.
The People’s Bank of China did not immediately respond to a Reuters request for comment.
cheap currency
Becky Liu, head of China macro strategy at Standard Chartered Bank, expects the yuan to continue depreciating.
“The interest rate gap is still wide, so many hedge funds continue to use the yuan as a funding currency,” Liu said.
“Apart from the carry trade, the other is seasonal as the dividend season will start soon. So in the short term, we don’t think the yuan has much upside room, instead we think it will face some pressure.”
Nomura analysts estimate that Mainland China’s listed dividend-paying companies in Hong Kong will make approximately $8 billion in dividend payments in each of June and July 2023.
The yuan’s usual tailwind from capital inflows is waning as exporters halt inflows and foreign investors are reluctant to buy into the market until convinced of stronger economic momentum and regulatory support.
While net foreign buying of Chinese stocks has reached about 193 billion yuan ($27.92 billion) so far in 2023, they sold 226.5 billion yuan worth of bonds in the first four months of this year, according to Reuters calculations based on official data.
A look at commercial banks’ foreign exchange operations shows that they are selling more dollars on the net. They sold $9.8 billion to their customers in the four months of this year, according to the State Administration of Foreign Exchange.
However, foreign exchange deposits have grown by $28 billion so far this year to $881.9 billion at the end of April, data from the People’s Bank of China shows.
($1 = 6.9121 renminbi)