Yuan drops as China central bank refrains from reserve ratio cut

The yuan fell 0.12 per cent, the most since Aug 13, to 6.3965 a US dollar.
The yuan fell 0.12 per cent, the most since Aug 13, to 6.3965 a US dollar. PHOTO: EPA

BEIJING (BLOOMBERG) - The yuan declined the most in more than a week on Monday (Aug 24) as the Chinese authorities refrained from taking steps to help the economy and stocks dived to a five-month low.

A 50 to 100 basis point cut in bank reserve-requirement ratios is "imminent", Mr Prakash Sakpal, a Singapore-based economist at ING Groep NV, wrote in a note on Monday, flagging a lack of action over the weekend as a surprise. The China Foreign-Exchange Trade System (CFETS) will publish a yuan rate against the US dollar five times a day, a table published on its website on Monday shows.

"The PBOC's absence of action and the stock-market plunge is putting significant pressure on the yuan," said Liu Xuezhi, a Shanghai-based macro-economy analyst at Bank of Communications Co. "The central bank will cut the RRR by the end of August or early September."

The yuan fell 0.12 per cent, the most since Aug 13, to 6.3965 a US dollar as of 10.44am in Shanghai, according to CFETS prices. The currency is allowed to trade as much as 2 per cent on either side of the People's Bank of China reference rate, which was set at 6.3862. CFETS published its rate for the yuan at 6.3966 at 11am.

"The CFETS move makes it more convenient for global investors to use the yuan as it offers benchmark rates that they can use as a reference when it's not regular trading hours in Europe or the US," said Xie Yaxuan, Shenzhen-based chief economist at China Merchants Securities Co. "This benefits China's push to internationalise the yuan and its ambition for reserve-currency status. It shouldn't be considered a tool to manage the foreign-exchange market."

The International Monetary Fund, which is reviewing its reserves basket in November and has delayed any expansion till September 2016, said in a report earlier this month that CFETS calculates yuan exchange rates four times a day. The 3pm benchmark is preferred by market participants as it is the most liquid and closest to the opening of trading in London, it said.

In Hong Kong's offshore market, the freely traded yuan weakened 0.15 per cent to 6.4640, according to data compiled by Bloomberg. The gap between the onshore yuan and the fixing was 0.17 per cent.