China guides yuan higher

IOL pic aug11 china yuan currency close-up epa EPA Picture: How Hwee Young, EPA

Shanghai - China guided its yuan currency stronger for a second straight session on Monday, in a move that might calm concerns about how far Beijing would let the currency fall, but its stock markets tumbled again as doubts persisted over its policy intent.

Perceived mis-steps by China's authorities have stoked concerns in global markets that Beijing might lose its grip on economic policy, even as the country looks set to post its slowest growth in 25 years.

A 1.5 percent depreciation in the yuan since the start of 2016, following a 4.7 percent weakening in 2015, has raised alarm among some trade rivals that China was risking a “currency war” of competitive devaluations.

The yuan's steadier performance could help temper those fears, but it failed to stop investors selling Chinese shares.

The Shanghai Composite Index and the CSI300 index ended down more than 5 percent after a 10 percent plunge last week that triggered a global sell-off of riskier assets.

Tapas Strickland, an economist at National Australia Bank, said “indecisiveness and lack of transparency” was exacerbating market uncertainty.

“Understandably, amidst this global markets are selling Chinese policymakers' ability to control their economy.”

The People's Bank of China set the mid-point for the yuan at 6.5626 per dollar, firmer than Friday's fix and substantially stronger than the spot yuan's unofficial close of 6.5938. The yuan is allowed to stray no more than 2 percent either side of the mid-point.

The PBOC had also set a stronger daily guidance rate for the yuan on Friday, following a sequence of eight weaker fixes that culminated in the biggest one-day drop in five months last Thursday.

“Different signals about FX policy have wrong-footed market participants, and we are wary in believing that an immediate calmness will soon emerge,” wrote Paul Mackel, head of emerging markets FX research at HSBC in a note.

“In this context, we expect yuan volatility to remain high, while depreciation pressures are likely to remain strong.”

Offshore intervention

The spot yuan strengthened in the morning to 6.5847, while the offshore yuan gained sharply to 6.6614, narrowing the spread between the two to under 1.2 percent. The spread, which stretched to more than 2 percent last week, was complicating Beijing's struggle to stop capital flowing out of the slowing Chinese economy.

The narrowing spread appeared in part to be down to offshore buying by China's central bank, analysts said, which was draining the supply of offshore yuan and in turn pushing offshore yuan interbank borrowing rates in Hong Kong (HIBOR) to record highs.

A former head of international payments at China's foreign exchange regulator urged investors not to be alarmed by foreign institutions “talking down” the yuan, saying the currency remained stable against most currencies, even though it was down against the dollar, the official Economic Daily reported on Monday.

Beijing launched the RMB index last month, which weights the yuan's exchange rate against a basket of trade-related currencies, a move that will eventually loosen the currency's link to the greenback.

Zhou Hao, Senior Emerging Markets Economist for Asia at Commerzbank AG, said the last two days' fixes did suggest that the central bank wanted to hold back the pace of yuan depreciation as the RMB index dropped to below 100.

“We still need some time to check the credibility of China's new currency basket,” he added.

Goldman Sachs, meanwhile revised its yuan forecasts for the coming year sharply lower to 7.00, and to 7.30 for 2017.

Chinese markets have had a tortuous start to the year, buffeted by the falling yuan, two days of stock exchange suspensions last week, and weak factory and service sector activity surveys.

All of which raised anxieties ahead of China trade data on Wednesday, which are expected to show further declines in exports and imports, underlining the parlous state of world trade flows.

Figures out over the weekend showed Chinese consumer inflation stuck at a subdued 1.6 percent in December, while producer prices were down a steep 5.9 percent on the year - a deflationary pulse that is being felt across the globe.

In a research note dated January 8, Moody's Investors Service put the market turmoil down to an inherent tension between Beijing's attempts to reform its economy and give a greater role to market forces while maintaining economic and social stability.

“Further financial market volatility is likely,” it said.


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