Offshore yuan declines to 5-year low as China loosens grip

Chinese yuan or renminbi (RMB) notes in Beijing, China on Dec 29.
Chinese yuan or renminbi (RMB) notes in Beijing, China on Dec 29. PHOTO: EPA

BEIJING (BLOOMBERG) - The yuan traded overseas fell to a five-year low on Wednesday (Dec 30) after China's central bank cut the onshore reference rate to the weakest level since May 2011, adding to speculation that the authority is guiding a decline as it focuses on rejuvenating economic growth.

The PBOC lowered its reference rate by 0.05 per cent on Wednesday to 6.4895, the weakest since May 2011. The yuan in Shanghai will probably drop 3.1 per cent by the end of 2016, according to the median forecast in a Dec 18-25 Bloomberg survey.

The freely traded offshore yuan fell 0.28 per cent to 6.5929 a dollar as of 11:52 am in Hong Kong, according to data compiled by Bloomberg. It earlier declined to 6.5970, the weakest since January 2011. The spot rate in Shanghai lost 0.08 per cent to 6.4903, according to China Foreign Exchange Trade System prices. That extends the onshore currency's decline to 4.4 per cent this year, the most in two decades.

The People's Bank of China has become more hands-off of late and allowed a "significant depreciation" in December, Malayan Banking strategists led by Saktiandi Supaat wrote in a note dated Tuesday. The monetary authority has tolerated a 1.4 per cent drop in the onshore currency this month, after propping up the exchange rate in the weeks leading up to the International Monetary Fund's Nov 30 decision to grant the yuan reserve status.

"The PBOC has less incentive to prop up the yuan now and is guiding the currency lower through fixings, allowing the exchange rate to reflect China's weak fundamentals," said Kenix Lai, a foreign-exchange analyst at Bank of East Asia in Hong Kong. "The offshore yuan will test the 6.6 level in the short-run. The PBOC won't likely intervene frequently next year as it seeks to make the currency more market-driven."

The nation's manufacturing sector probably contracted for a fifth straight month in December, according to the median forecast in a Bloomberg survey. The official purchasing managers index is due to be released by the National Bureau of Statistics on Jan 1. Gross domestic product growth will slow from an estimated 6.9 per cent this year to 6.5 per cent next year, according to another Bloomberg survey.

The central bank may intervene in the offshore yuan market to defend the 6.60 per dollar level, said Zhou Hao, an economist at Commerzbank AG in Singapore. The PBOC is unlikely to allow the gap between the offshore and onshore yuan to stay persistently stay above 1,000 so-called pips because it hurts sentiment, he added. The spread is now around 1,025 pips.

The monetary authority has halted some foreign-exchange services of foreign banks, according to a Reuters report that cited three unidentified people. The PBOC has temporarily suspended services including liquidation of spot positions for clients, some services related to cross-border, onshore and offshore businesses, it added.