China's yuan at weakest in more than a year as selloff accelerates

Thu Mar 20, 2014 5:51am EDT

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By Saikat Chatterjee
    HONG KONG, March 20 (Reuters) - China's yuan plunged to its
weakest levels against the dollar in more than a year on
Thursday as investors increased selling having interpreted
signals from the central bank that it was  comfortable with the
fall.
    The yuan has tumbled more than 1.2 percent so far this week
and is set for its biggest weekly loss since 1992 after the
People's Bank of China at the weekend doubled the yuan's trading
range to 2 percent either side of the midpoint it fixes daily.
     Aimed at injecting more two-way volatility into the
currency market, markets read the central bank's action as a 
sign that it was willing to tolerate more yuan weakness in the
short term after it engineered a dramatic fall in February to
flush out one-way betting by speculators who had been expecting
the yuan to gain.
    "The yuan will remain weak in the coming three months and it
will not be a surprise if it depreciates by 0.5 to 1 percent,"
said a trader at a Chinese Bank in Shanghai. 
    The yuan opened at 6.2080 per dollar and fell as far as
6.2334, its lowest since Feb 25, 2013 before recovering
partially to close at 6.2275.    
    The yuan had closed trade on Wednesday at 6.1965.
    Sending another signal to the market, the central bank set
Thursday's midpoint at 6.1460 per dollar, the lowest since last
November and down from Wednesday's 6.1351.
    The yuan is down nearly 3 percent so far this year, having
risen for the previous four years. One-year offshore forwards,
or non-deliverable forwards, are suggesting the yuan will fall
to 6.23 per dollar in a year.    
    
    OVERDONE?
    A run of disappointing data shows China's economy has lost
steam at the start of 2014, and the country's first domestic
bond default and subsequent media reports of trouble at other
companies has added to pressure in its financial markets.
    Some analysts are now worrying about how the weaker yuan
will affect companies which have loaded up on foreign currency
debt in recent years. Companies in the property sector,
industrials and energy are among the most vulnerable to any
sharp depreciation, Morgan Stanley analysts said.
    Others say the yuan's weakness may be overdone.
    "If you look at the fundamentals, China is as strong as it
can get, said Kelvin Tay, regional chief investment officer of
wealth management at UBS in Singapore, listing China's foreign
exchange reserves of $3.8 billion, its external surpluses and
low foreign debt relative to GDP.
    Premier Li Keqiang said China will speed up investment and
construction plans to ensure domestic demand expands at a stable
rate - an indication authorities are considering practical
measures to support slackening economic growth. ID:nL3N0MH1CS]
    But concerns of a hard landing for the economy mounted in
recent days, resulting in sharp falls in China focused assets,
with an index tracking mainland enterprises traded in
Hong Kong now more than 20 percent off a Dec. 2 high.
    Tay reckoned those fears for the economy were overdone. 
    "Anyone who is panicking over that should seriously look at
and rethink why they are panicking." 
    
    The onshore spot yuan market at a glance:      
 PBOC midpoint              6.146     6.1351    -0.18%
 Spot yuan                  6.2275    6.1965    -0.50%
 Divergence from midpoint*  1.33%               
 Spot change ytd                                -2.79%
 Spot change since 2005 revaluation             32.90%
 *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 2 percent from official midpoint rate it sets each
morning.

    OFFSHORE CNH MARKET   
    In the offshore market, the yuan, or the "CNH" as it is
commonly known, weakened past the 6.20 per dollar line in line
with the weakness in the market precipitated on concerns of the
presence of large derivative products.
    Traders said the slide in the offshore yuan has left it at
critical levels for holders of an offshore derivatives product,
exposing them to heavy losses that may fuel a further slide in
the currency.                 
    
The offshore yuan market at a glance:    
 
 Instrument                   Current   Difference from onshore
 Offshore spot yuan           6.2025    -0.19%
 *                                      
 Offshore non-deliverable     6.23      -1.35%
 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: link.reuters.com/cyx46v
    - Hot money tracker: Hot money inflows slowed to a trickle
in December 2013 GRAPHIC: link.reuters.com/saz74t
    - China's trade surpluses mainly driven by weak imports
rather than strong exports. GRAPHIC: link.reuters.com/qav68s
    - Corporate FX behavior reflects yuan appreciation
expectations. GRAPHIC: link.reuters.com/tyx74t
    - Despite relatively stable dollar/yuan exchange rate, the
yuan is appreciating on a trade-weighted basis. GRAPHIC: link.reuters.com/sed74t
    
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 (Additional reporting by Michelle Chen and Saeed Azhar in
SINGAPORE; Editing by Simon Cameron-Moore)
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