China currency official defends yuan depreciation, forecasts volatility

A clerk counts 100 Chinese yuan banknotes at a branch of China Merchants Bank in Hefei, Anhui province on March 17, 2014. -- FILE PHOTO: REUTERS 
A clerk counts 100 Chinese yuan banknotes at a branch of China Merchants Bank in Hefei, Anhui province on March 17, 2014. -- FILE PHOTO: REUTERS 

SHANGHAI (REUTERS) - The division head at China's State Administration of Foreign Exchange (SAFE) said on Tuesday the current weakness of the Chinese currency is acceptable and he predicted more volatility going forward.

Mr Guan Tao, head of the international payments division at SAFE, wrote in the official Shanghai Securities News on Tuesday that the yuan's dramatic slide in 2014 was rational, given the performance of other emerging market currencies.

"From the beginning of 2013 to the end of March, major emerging market currencies have devalued by an average of 8.2 percent, while at the same time the renminbi's official midpoint has appreciated 2.5 percent," he said, adding that the volatility implied in yuan futures contracts was far lower than comparable emerging market currencies.

The midpoint, a guidance rate set by the central bank, has indeed appreciated since the 2013, but the actual traded rate, which is allowed to diverge from the midpoint within a designated range each day, has not followed. On April 30 it changed hands at a low of 6.2676, its lowest point since October 2012.

Mr Guan said he believed sentimental factors had led the yuan market to become more bullishly speculative than warranted, an thus deserved a correction.

While he said the article expressed his personal views, not those of the wider policy apparatus, publication in official media usually implies wider tacit official endorsement of the views expressed. "The currency has become less like a commodity and more similar to assets like stocks and bonds," he wrote.

"Factors not related to capital flows and trading have been increasingly influential, including psychological factors and hopes for asset value appreciation."

Capital account inflows into China have exceeded those from trade over recent years, putting pressure on the yuan to appreciate, but traders now say market expectations for appreciation have eased significantly.

The article comes as the yuan's value has rebounded sharply in the past two trading sessions, which forex dealers told Reuters is thanks to the renewed involvement of state-owned banks, this time buying up yuan in the market and relieving depreciation pressure.

Until the rebound this week, the yuan had lost 3.3 percent this year, giving up all of its 2013 gains, guided by weaker midpoint settings by the People's Bank of China (PBOC) with the strong support - traders said - of dollar buying by China's major big four state banks.

However, traders said while that intervention wound down weeks ago, the yuan continued to slide as bearish sentiment took hold in the market, driven by companies stocking up on dollars for trade, investment, and as a protective hedge against future depreciation.

Mr Guan, however, said that capital inflows into China remain healthy, and the offshore yuan's price remains close to the onshore yuan, indicating the current level "is widely accepted." Guan criticised Chinese companies for being poorly prepared to handle increased yuan volatility in recent months, causing them to suffer losses.

Shortly after the yuan embarked on its rapid depreciation, the PBOC widened the intraday trading band to allow the exchange rate to rise and fall by 2 percent on each side of the daily midpoint, which regulators hoped would discourage speculators from buying up yuan on the assumption it was a one-way bet on appreciation.

"Since March, more and more enterprises have begun hedging foreign exchange exposure as the latest volatility has taught the market a good lesson," Mr Guan wrote in the article.

"It is necessary to guide enterprises to be aware of exchange rate risk so that they can manage the risk of two-way volatility proactively," Mr Guan said.

"(People) should not read too much into the recent short-term volatility of the yuan's exchange rate, let alone take it as a change in China's exchange rate policy."