© Reuters. FILE PHOTO: Chinese Yuan banknotes are seen in this illustration taken on February 10, 2020. REUTERS / Dado Ruvic / Illustration // File Photo
Written by Winnie Zhou, Brenda Goh, and Tom Westbrook
SHANGHAI/SINGAPORE (Reuters) – China’s yuan fell to a six-month low against the dollar and analysts say it could weaken further as investors worry about an epidemic recovery in the world’s second-largest economy.
Disappointing economic data, widening yield differentials with the US, upcoming corporate dividend payments, and continued capital outflows through foreign selling of stocks and bonds combined to drag the currency back to levels last seen in November.
The yuan has fallen more than 5% against the dollar’s rally since the highs it hit in January, when global markets embraced the reopening of China’s borders, one of the worst-performing Asian currencies this year. It was last traded at 7.0585 per dollar on Friday.
“The yuan is suffering because the story of China’s reopening is less attractive than before, and there is no sign of further stimulus,” said Gary Ng, chief economist for Asia-Pacific at Natixis.
“A weaker currency at the current stage could help the performance of exports, especially since global trade has been contracting this year.”
Exports have been one of the few bright spots for the Chinese economy over the past few years, but new orders have fallen in recent months amid slumping global demand.
Sources told Reuters that the Commerce Ministry recently asked exporters, importers and banks about their currency strategies and how a weaker yuan might affect their business.
To be sure, the central bank has ample policy tools to prevent excessive currency movements. The People’s Bank of China (PBOC) said last month that it would firmly curb large fluctuations in the exchange rate and consider strengthening self-regulation of dollar deposits.
“The expectations of financial institutions, companies and residents regarding the exchange rate are generally stable, which is a solid foundation and a strong guarantee for the smooth operation of the foreign exchange market,” the central bank said in the statement.
However, despite the yuan’s rapid faltering over the past month, traders have reported only a few occasions when state banks were suspected of stepping in to prop up the currency.
The People’s Bank of China did not immediately respond to a Reuters request for comment.
“Basically the PBOC seems content to let the US dollar rally higher, amid fading growth momentum in China,” said Alvin Tan, head of Asia currency strategy at RBC Capital Markets.
“After all, devaluation is a form of monetary easing,” Tan said, maintaining his forecast for the yuan to trade at 7.1 at the end of the third quarter before ending the year at 7.05.
The central bank “seems to be tolerating yuan weakness,” said Tommy Wu, chief China economist at Commerzbank (ETR), noting that recent official daily guidance rates for the yuan were in line with market expectations.
However, economists and analysts do not expect sharp declines from now on. Of six global investment houses polled by Reuters this week, all said they did not expect the yuan to decline beyond 7.3 this year, the lowest level recorded in 2022 as tough anti-virus restrictions hurt the economy.
“A weaker yuan helps exporters when they convert dollar receivables into yuan,” he said. Barclays (LON:) forex strategist Lemon Zhang. “But anticipating future currency weakness does not help capital inflows, as investors worry about foreign exchange losses when they look at yuan-denominated assets.”
A weaker yuan could also ease the deflationary pressures we are seeing in parts of the economy due to weaker domestic demand.
However, the currency’s implied volatility, which is the options market’s measure of future volatility, has been fairly stable. The repayment period for the month was 4.5, the highest since April. The six-month trading price of the yuan in the forward market was 6.96 per dollar.
Some market watchers suspect the People’s Bank of China may cap dollar deposit rates, a move that could encourage companies to liquidate their large dollar positions to ease negative pressure on the yuan.
“Chinese officials will not intervene unless the spot yuan weakens rapidly to 7.2,” said Serena Zhou, chief China economist at Mizuho Securities.
“Note that the People’s Bank of China (PBOC) has not intervened in any of its policy tools, such as the ‘countercyclical factor’ in pricing the yuan peg or the foreign exchange risk reserve ratio, to support the yuan.”