UPDATE 2-Yuan suffers biggest weekly loss as PBOC punishes speculators

Fri Feb 28, 2014 4:39am EST

Related Topics

* Yuan nearly hits weak end of 1 pct trading band
    * Yuan suffers biggest weekly loss around 0.9 pct
    * More weakness seen as authorities stamp out speculative
money
    * FX market reform measures expected in March


    By Michelle Chen
    HONG KONG, Feb 28 (Reuters) - China's yuan suffered its
biggest weekly loss on record on Friday, as the central bank
stepped up its intervention to weaken the currency ahead of a
key government meeting next week which may be used as a platform
to unveil more market reforms.   
    Directed at squeezing out speculators betting on continued
yuan gains, the central bank has set about actively weakening
its currency since mid-last week by using a mix of weak daily
fixings and asking its agent banks to buy dollars.
    The sudden slide in the yuan has added to global investor
nervousness about China's slowing economy, high levels of local
government debt and an increasingly risky shadow banking system.
    The intervention reached a frenzied pitch on Friday, with
the onshore yuan falling by its daily one percent limit against
a midpoint fixing for the first time since July 2012.
    Some analysts expect more weakness in the coming days.
    On Friday, the yuan briefly weakened to 6.1808 per dollar in
intraday trade, more than 0.8 percent below the previous close
despite the central bank fixing the yuan slightly stronger at
6.1214 per dollar. 
    The Chinese currency closed at 6.1450 per dollar, down 0.27
percent from the previous day's close at 6.1284. It racked up
its biggest-ever weekly loss of around 0.9 percent and largest
monthly loss of 1.4 percent. 
    "I think there is a good chance for spot yuan to break the
6.20 psychologically important level, and it can happen as early
as next week," said Kenix Lai, a senior market analyst at Bank
of East Asia. "Only fast depreciation of the yuan can stamp out
speculative money betting on yuan appreciation." 
    Stepped-up efforts by the People's Bank of China to actively
weaken the currency has led the yuan to a dramatic weakening
cycle that many analysts believe may be a prelude to more
foreign exchange market reforms including widening a daily
trading band at an annual parliamentary meeting next
week. 
    While the yuan has been allowed to move in a 1 percent
trading band against the U.S. dollar on either side of the
central bank's daily reference rate since April 2012, it has
mostly hugged the stronger end of the band.
    As a relatively low-risk, high-yield currency that has
gained more than 35 percent against the dollar since it was
revalued in 2005, the Chinese yuan has become a growing
favourite among international investors.   
    The yuan has firmed every year against the dollar since 2010
with recent gains coming amid very little volatility and despite
widespread weakness among emerging market currencies, fuelling
growth of speculative capital flows.
    Those hot-money inflows -- UBS estimates that amount at more
than $150 billion in 2013 -- have complicated the task of the
central bank's policy management as it seeks to curb the growth
of shadow banking activities.
    The yuan's dramatic fall since last week is aimed at
stamping out those speculative plays.
    "Have you changed your expection of the yuan to
depreciation? If not, I suggest changing it as soon as possible.
I have changed mine and think it will stay weak for the next
three months," said a trader at a Chinese bank in Shanghai.
    
    RISKS GROWING 
    China's weakening of the yuan over the past 10 days has
exposed risks created by the rapid growth of offshore derivative
products, with holders seen potentially facing billions of
dollars of losses if the currency keeps falling. 
    Bankers say the buyers of these leveraged bets -- and
Deutsche Bank estimates $100 billion have been sold this year
alone -- have largely been Chinese companies with large dollar
receivables, who saw the products as a way to earn some extra
income given the seemingly inexorable rise of the
yuan. 
    Regarding the yuan's recent sharp decline, China's foreign
exchange regulator has launched an investigation into its
possible impact on foreign exchange transactions at domestic
banks and companies, banking sources said on Thursday.
    
    Despite the slump in the past two weeks, a rare phenomenon
in its history, analysts do not think it will be the trend in
the long term.
    The world's second-largest economy is still under pressure
from  heavy capital inflows both under the current account and
the capital account. Higher interest rate levels and better
economic fundamentals will continue to attract fund inflows.
    The market is keeping a close eye on the National People's
Congress to be held from next Wednesday, as traders believe it
may be the time the central bank announces important policies on
the foreign exchange market.   

The onshore spot yuan market at a glance: 
    
 Item                        Current      Previous   Change
 PBOC midpoint               6.1214       6.1224     0.02%
 Spot yuan                   6.145        6.1284     -0.27%
 Divergence from midpoint*   0.39%                   
 Spot change ytd                                     1.39%
 Spot change since 2005 revaluation                  34.69%
 
*Divergence of the dollar/yuan exchange rate. Negative number
indicates that spot yuan is trading stronger than the midpoint.
The People's Bank of China (PBOC) allows the exchange rate to
rise or fall 1 percent from official midpoint rate it sets each
morning.

    OFFSHORE CNH MARKET   
    The offshore spot yuan          changed hands at 6.1205,
down 0.33 percent from Thursday's close at 6.1006. 
    
The offshore yuan market at a glance:    
    
 Instrument                   Current      Difference from
                                           onshore
 Offshore spot yuan           6.1200       0.41%
 Offshore non-deliverable     6.1559       -0.56%
 forwards                                  
    
*Premium for offshore spot over onshore 
**Figure reflects difference from PBOC's official midpoint,
since non-deliverable forwards are settled against the midpoint.
. 
    
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    KEY DATA POINTS
    - Yuan is positive outlier compared with plunging emerging
market currencies GRAPHIC:- Hot money tracker: Hot money inflows slowed to a trickle
in December 2013 GRAPHIC:- China's trade surpluses mainly driven by weak imports
rather than strong exports. GRAPHIC:- Corporate FX behavior reflects yuan appreciation
expectations. GRAPHIC:- Despite relatively stable dollar/yuan exchange rate, the
yuan is appreciating on a trade-weighted basis. GRAPHIC:>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
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