China cuts yuan reference rate

BEIJING • China has cut the yuan's reference rate to the weakest since 2011, fuelling speculation that it is trying to release pent-up depreciation pressure before an expected increase in United States central bank interest rates.

There are signs that the People's Bank of China (PBOC) has started guiding the yuan lower before the Federal Reserve acts next week, according to Bloomberg Intelligence economists Tom Orlik and Fielding Chen.

The authorities are conducting a "stress test" in the currency market before the Fed moves, Mr Zhou Hao, a Singapore-based senior economist at Commerzbank, said in an interview on Tuesday.

The PBOC reduced the yuan's fixing, which limits onshore moves to 2 per cent on either side, by 0.1 per cent to 6.4140 a dollar, the weakest since August 2011. The spot rate dropped 0.11 per cent to 6.4244 as of 2.44pm in Shanghai, taking its decline to 0.4 per cent since the International Monetary Fund decided to admit the currency into the Special Drawing Rights (SDR) basket.

The yuan closed at a four-year low yesterday - its biggest loss in more than five weeks. The spot market opened at 6.4205 per dollar and closed at 6.4280, 0.17 per cent weaker than the previous close - and its biggest daily loss since Nov 2. The offshore yuan was trading 1.08 per cent weaker than the onshore spot at 6.4985 per dollar.

"We are moving to the next phase after the SDR inclusion as they are gradually stepping back and allowing a gradual depreciation," said Mr Eddie Cheung, a Hong Kong-based currency strategist at Standard Chartered. "The yuan is becoming more sensitive to the dollar and market forces."

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A version of this article appeared in the print edition of The Straits Times on December 10, 2015, with the headline 'China cuts yuan reference rate'. Print Edition | Subscribe