News analysis

Uphill task to assure investors of yuan stability

SHANGHAI/HONG KONG • Chinese policymakers tried to assure world leaders last week that they have no intention of pushing the value of the yuan down further to gain a competitive advantage. Their most pressing task though is to persuade financial markets.

Investors are far from convinced that the Chinese government wants to hold the yuan steady for long, following an unexpected devaluation in August and perceived policy flip-flops, which fuelled financial market jitters that the economy was in worse shape than Beijing had let on.

"It's very dangerous if the market keeps thinking the yuan needs to depreciate more," said a senior portfolio manager at an Asian asset management firm in Hong Kong. "The central bank has successfully stabilised the market for now," he said, declining to be identified because he is not authorised to speak publicly to the media. "However, I do not think the market expectation of a weaker yuan has been changed and many people believe it will fall around 5 per cent this year."

The yuan has already fallen 3 per cent against the US dollar following the devaluation, which added fuel to a stocks slump and flight of capital out of China.

China's markets steadied at the end of last year following a flurry of measures by the government, then fell again this month.

For the past week or so, the central bank has held the yuan steady and Chinese officials at the Davos World Economic Forum in Switzerland last week said the government had no intention to push the currency down, the latest in a series of similar remarks by China's officials, including Premier Li Keqiang.

While China is unlikely to conduct another one-off devaluation any time soon, given the global market turmoil it sparked and the barrage of criticism over a perceived failure to communicate policy effectively, markets expect Beijing to allow the currency to fall.

China has spent heavily to discourage speculators - earlier this month state-bank currency purchases drove yuan borrowing rates in Hong Kong to record highs - but markets where Chinese policymakers have less influence are pricing in a big depreciation against the US dollar.

Offshore non-deliverable yuan forwards, a speculative instrument, are pricing in a 4 per cent fall one year ahead, up from just 2 per cent in mid-October. The pricing also suggests investors see a fall of around 1 per cent in March or April.

Spikes in onshore short-term borrowing costs in recent weeks - despite record cash injections by the central bank - suggest capital outflows are intensifying, some analysts say.

The yuan has fallen 3 per cent against the US dollar following the Chinese currency's devaluation last August, which added fuel to a stocks slump and flight of capital out of China.
The yuan has fallen 3 per cent against the US dollar following the Chinese currency's devaluation last August, which added fuel to a stocks slump and flight of capital out of China. PHOTO: REUTERS

Cash demand rises ahead of the Chinese New Year holiday, which the central bank acts to offset with temporary cash injections to the banking system. But some economists say this year's big injections - the largest in at least two years last week - reflect central bank attempts to steady domestic liquidity after currency intervention to offset capital outflows.

"While the central bank stated that the liquidity injection is to prepare for possible liquidity shock amid the Chinese New Year season, we see that this is primarily to counter the strong capital outflows and the withdrawal of yuan liquidity due to FX market intervention," Mr Zhou Hao, senior emerging markets economist at Commerzbank in Singapore, wrote in a client note.

REUTERS

A version of this article appeared in the print edition of The Straits Times on January 27, 2016, with the headline 'Uphill task to assure investors of yuan stability'. Print Edition | Subscribe