By Saikat Chatterjee
HONG KONG, May 8 The recent weakness of the
Chinese currency has fanned debate on whether a currency
devaluation is on the cards.
The reason for this line of thinking is fairly well known.
Faced with few options without fueling a buildup to the pile
of non-performing loans, Beijing may weaken the currency by
buying dollars, throwing its exporters a lifeline and using the
growth pickup and surge in yuan interbank liquidity from its
aggressive intervention to clean up the banking system.
A currency devaluation would not be a first. In 1994, China
devalued the yuan by a third to 8.7 per dollar and with economic
growth forecast at its lowest rate of expansion in more than two
decades at 7.3 percent in 2014, it may be time for a fresh round
Daily fixing patterns by the People's Bank of China, the
country's central bank which serve as guideposts for currency
trading, show authorities have actively sought a weaker renminbi
in recent days.
In April, the Chinese renminbi fell by 0.7 percent against
the dollar, taking its year-to-date losses against the greenback
to more than 3 percent and wiping out all its gains for 2013 and
nearly 2012 as well.
Currency markets attribute the yuan's weakness to the weaker
than forecast mid-point fixings by the central bank around which
the currency is allowed to trade 2 percent on a daily basis.
But the reality may be more mundane. Faced with large
speculative bets focused on a stronger currency at the start of
the year, China's central bank has sought to flush out these
positions by weakening the currency actively this year.
Those speculative trades in the disguise of hot money
inflows have hardly slowed despite the yuan's dramatic fall in
recent weeks. In March, Chinese banks posted a $40.2 billion
surplus in spot foreign exchange transactions, slightly below
February's big surplus indicating robust capital inflows.
But that may start to slow. Market estimates for the
currency are being rapidly revised lower, indicating the yuan's
current round of weakness may be nearing an end as China's
central bank becomes more confident it has successfully broken
the spell of appreciation expectations among onshore companies.
"The yuan's drop this year is a tiny fraction of the gains
it has made over the last few years and is aimed at speculative
positions," said Eric Yum, head of CNH and HKD trading at JP
Morgan in Hong Kong.
HSBC, for example has revised its yuan estimates to 6.14 per
dollar by the end of 2014 from 5.98 previously, while a Reuters
poll showed that short positions on the Chinese currency have
grown in recent weeks.
And while the Chinese economy is far larger than in the 90s,
it is also a far more open economy, which means if expectations
of extended yuan weakness become entrenched, it could lead to
large destabilising capital outflows.
Those outflows may come at a delicate time for authorities,
especially when China has increased efforts this year to reform
capital markets and promote the renminbi in global trade.
CHART OF THE WEEK: link.reuters.com/har78v
The wider currency band has injected a fresh round of
weakness for the Chinese currency. In recent days, the renminbi
has floated towards the weaker end of the band.
WEEK IN REVIEW:
China's only listed bad debt management firm Cinda Asset
Management raised $1.5 billion in dual-tranche U.S.
dollar debt this week. The funds will be used to boost funding
lines as the Chinese economy slows. The company raised offshore
yuan debt in December.
The Export-Import Bank of China is returning to the offshore
yuan bond markets. It released guidance on a three-part "dim
sum" bond offering this week indicating demand remained robust
for quality paper. It sold 4 billion yuan of debt in January.
China's central bank said this week it would keep monetary
policy steady while introducing greater yuan flexibility. About
a third of respondents in a survey conducted by the central bank
expected the yuan to depreciate in the next half-year, while
66.9 percent believed the yuan would appreciate, the central
CNH Tracker: link.reuters.com/fys77t
HK central bank says time right to raise yuan conversion cap
More stories about the CNH market
Daily onshore yuan reports
Daily China money market reports
Offshore yuan rate Onshore yuan rate
Offshore yuan dealt Onshore yuan on CFETS
THOMSON REUTERS SPEED GUIDES
(Additional reporting by Nethelie Wong; Editing by Kim Coghill)