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China's yuan slides to near one-year low as economic risks mount
March 19, 2014 / 10:26 AM / 4 years ago

China's yuan slides to near one-year low as economic risks mount

* Yuan deviates 1 pct from mid-point for first time
    * Drop comes amid growing worries over risks to China
economy
    * Offshore yuan dips following onshore weakness
    * Worries more selling ahead as structure products under
pressure

 (Updates with market close, more analyst comments)
    By Michelle Chen
    HONG KONG, March 19 (Reuters) - China's yuan fell beyond
6.20 to the dollar on Wednesday for the first time since April
last year amid market speculation the central bank will keep the
currency weak as economic growth slows.
    The yuan has tumbled 0.8 percent so far this week after the
People's Bank of China (PBOC) on Saturday doubled the daily
trading band allowed for the currency to 2 percent from the
mid-point that it sets each day.
    Spot yuan briefly fell as low as 6.2040 in early
afternoon trade before ending at 6.1965. That marked a 0.07
percent loss on the day from Tuesday's close, and a fall of 1
percent from the mid-point.     
    "We see risks of further near-term yuan weakness, but do not
expect this to extend beyond the second quarter. It is not in
the PBOC's interests to have a sustained depreciation in the
currency, as this will increase financial stability risks,"
economists at ANZ said in a research note.
    Other analysts agreed that allowing the yuan to weaken too
far, too fast would only increase the stresses on Chinese
companies and the broader economy.
    ANZ expects the currency to return to a modest appreciation
trend in the second half, but still end the year weaker for the
first time since Beijing unshackled it from its fixed exchange
rate to the dollar in 2005.
    The currency has risen more than 30 percent since then,
attracting a growing number of global investors, big and small,
many of whom have come to see it as a one-way appreciation bet.
    ANZ like many other market watchers has now dialed back 
expectations for the yuan, revising its year-end yuan forecast
to 6.08 from 5.98.
    "The yuan may not appreciate this year given China's weak
economy," agreed one trader in Shanghai. "The return of yuan
strength will not only rely on when the economy bottoms out, but
when fresh long yuan funds come in."   
    While the recent slide in the yuan is widely seen as a move
engineered by the central bank to punish speculators, it has
coincided with heightened anxiety among global investors that
long-standing risks in China may be coming to a head.
    The economy clearly lost steam in the first two months of
the year and rising debt worries following the country's first
domestic bond default are adding to pressure on its currency and
stock markets. A flurry of local media reports of troubled steel
and property companies have compounded market jitters.
    Some traders suggested the yuan's decline may reflect
policymakers' desire to offer some help to the sluggish economy,
by effectively easing monetary conditions, while others said
that may only be a welcome side-effect of the PBOC's move to
deepen market reforms.
    Speculation that Beijing may soon announce stimulus measures
for the economy has grown since data last week showed growth in
investment, retail sales and factory output all falling to
multi-year lows.   
    "The currency band widening at this moment has two
advantages. One is to signal that the reform agenda will not be
easily given up despite weak economic condition. Second, while
band widening itself has little impact on the economy, the
possible consequence could be used to stabilize growth," said
Zhu Haibin, an analyst at JP Morgan.    
    However, not all traders subscribe to that view. Others said
the yuan's decline reflected genuine trade as investors reduced
long positions in the currency as the PBOC looks to implement
deeper reforms.
    They pointed to the fact that just two days into the 2
percent band regime, the market had already moved the currency
by the equivalent of the previous band's 1 percent limit.
    When the band was last widened in 2012 - to 1 percent from
0.5 percent - it took the market two weeks to build up the
courage to test even the previous band's width given how closely
the central bank controls the market.
    Indeed, in recent weeks sentiment on the Chinese yuan had
already turned bearish for the first time since mid-2012 as the
PBOC rounded on speculators and looked to curb hot money
inflows, a Reuters poll showed last week. 
    A weaker currency could also work against exporters if it
also grows more volatile, raising their hedging costs.
    
    OFFSHORE YUAN ALSO VULNERABLE
    The yuan's decline reverberated offshore, where the
currency's non-deliverable forwards (NDFs) indicated further
weakness to come.
    One-year NDFs priced the yuan 1.5 percent below the
mid-point fixing, compared with half a percent in December.
    Deliverable yuan in Hong Kong fell to its lowest level since
April 2013, with traders predicting further weakness because
structured product positions could come under pressure.
    Offshore yuan fell to 6.1995 per dollar in
afternoon trade, extending a streak that has seen it weaken by
2.6 percent in nearly a month, wiping out its 2013 gains. It
later regained some strength and traded at 6.1855.
    "Investors are deleveraging the yuan appreciation
expectations in the short-term following the band widening,"
said a dealer in Hong Kong.
    The fall in the offshore yuan spot rate to nearly 6.20 per
dollar, the lowest level in more than 11 months, is pressuring
lots of structured yuan products which were originally sold
around that level, pointing to the risk of a blowout on the
short-end volatility curve. 
    More than $300 billion of these structured products have
been sold since 2013 and the yuan's drop has raised the chances
of some of these products defaulting, adding another
destabilising factor in the market.
    Analysts say they expect further market reforms following
the widening of yuan band. The next meaningful reform would be
for Beijing to shift to a new market-based regime and away from
setting the daily yuan fixing.
    As an intermediate step, China could peg the yuan to a
basket of currencies weighted by the importance of its trading
partners. Lu Ting, an analyst at Bank of America Merrill Lynch
said that more specifically, Singapore's so-called BBC regime,
or basket, band and crawl, seems to be favoured.
    In some countries where hungry investors have jumped into
yuan-related investment products, regulators are also expressing
concern about risks as the currency becomes increasingly adopted
worldwide.
    South Korean regulators are inspecting units of four foreign
banks, sources told Reuters on Wednesday, as authorities worry
about systemic risks from the rapid growth in yuan-denominated
deposits. In Taiwan, where the yuan accounted
for a fifth of the island's total foreign currency deposits in
January, regulators recently warned investors to expect more
volatility in yuan.
    The yuan surpassed the Swiss franc to become the seventh
most-used world payments currency in January, global transaction
services organisation SWIFT said.
    The "redback" is now only ranked behind the U.S. dollar,
euro, sterling, yen, Canadian dollar and Australian dollar in
terms of global payments, according to SWIFT.   
             
The onshore spot yuan market at a glance: 
 Item                        Current    Previous     Change
 PBOC midpoint               6.1351     6.1341       -0.02%
 Spot yuan                   6.1965     6.192        -0.07%
 Divergence from midpoint*   1.00%                   
 Spot change ytd                                     -2.30%
 Spot change since 2005 revaluation                  33.57%
 
*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 yuan market at a glance:       
 Instrument                  Current  Difference from onshore
 Offshore spot yuan          6.1855   -0.12%
          *                           
 Offshore non-deliverable    6.2235   -1.42%
 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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 (Editing by Neil Fullick & Kim Coghill)

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