* Yuan deviates over 1 pct from midpoint for first time
* Offshore yuan dips following onshore weakness
* Worries more selling ahead as structure products under
By Michelle Chen
HONG KONG, March 19 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 down.
The yuan has tumbled 0.8 percent this week after the
People's Bank of China (PBOC) doubled the daily trading band for
the currency to 2 percent from the mid-point set each day by the
Spot yuan briefly fell to 6.2009 per dollar by
midday, down 0.14 percent from Tuesday's close of 6.1920 and
more than 1 percent weaker than the mid-point set earlier of
"The yuan may not appreciate this year given China's weak
economy," said a 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."
Data this year, including a surprise 18 percent drop in
exports in February and soft manufacturing reports, have raised
concerns that China may struggle to meet its growth target this
year of around 7.5 percent.
Rising debt worries following the country's first domestic
bond default and the looming bankruptcy of a Chinese developer,
have added to market jitters.
Some traders suggested the decline in the currency may
reflect the central bank's desire to offer a sluggish economy
some help by effectively easing monetary conditions.
However, not all traders subscribed to that view. Others
said the decline reflected genuine trade to reduce long
positions in the currency.
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.
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 midpoint
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 6.1953 per dollar in morning
trades, stretching a streak that has seen it weaken by 2.6
percent in nearly a month, wiping out its 2013 gains.
"Investors are deleveraging the yuan appreciation
expectation in the short-term following the band widening," said
a dealer in Hong Kong.
The fall in the offshore yuan spot rate beyond 6.19 per
dollar, the lowest level in more than eleven 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 looms.
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 favored.
The onshore spot yuan market at a glance:
Item Current Previous Change
PBOC midpoint 6.1351 6.1341 -0.02%
Spot yuan 6.2 6.192 -0.13%
Divergence from midpoint* 1.06%
Spot change ytd -2.36%
Spot change since 2005 revaluation 33.49%
*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
OFFSHORE CNH MARKET
The offshore yuan market at a glance:
Instrument Current Difference from onshore
Offshore spot yuan 6.1947 -0.27%
Offshore non-deliverable 6.2255 -1.45%
*Premium for offshore spot over onshore
**Figure reflects difference from PBOC's official midpoint,
since non-deliverable forwards are settled against the midpoint.
- New quotas rekindle debate over dim sum market's future
- Flood of offshore yuan bonds may spark higher yields
- China investors face bumpy ride as reform speculation
- CHINA MONEY - PBOC preparing market for more yuan
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
(Editing by Neil Fullick)