By Rae Wee and Vidya Ranganathan
SINGAPORE, March 27 (Reuters) – The Chinese yuan is on a downward spiral, sparking suspicions that authorities are orchestrating a gentle devaluation to complement loose monetary policies and prop up exports.
While the yuan has slipped around 2% against the dollar this year, it pales in comparison to the more pronounced drops seen in Japan’s yen and regional currencies like South Korea, Thailand, and Taiwan.
Market participants have noted subtle signs indicating a deliberate maneuver. The People’s Bank of China (PBOC) seemingly loosened its grip on the yuan, letting it breach the 7.2-per-dollar threshold that was staunchly defended by state-owned banks in the past.
Last Friday, the absence of state banks allowed the yuan to touch 7.23 against the dollar initially, marking its most significant daily decline in nearly three months despite later intervention.
According to analysts at National Australia Bank (NAB), the timing of the PBOC’s relaxed stance coincided with the Bank of Japan’s policy shift away from negative rates and yield-curve control.
While the BOJ’s move was impactful, the yen has paradoxically weakened further, plummeting 7% against the dollar this year and hitting a 30-year low against the yuan.
NAB’s Ray Attrill and Rodrigo Catril suggest that concerns over export competitiveness vis-à-vis Japan might have spurred the decision to lift the 7.20 cap on the yuan.
Undercurrents and Pressures
Despite signs of rebounding exports early this year, China’s manufacturing sector grapples with challenges, with weak export orders underscoring the need for further support. A weaker yuan could potentially bolster export earnings.
Analysts at Oxford Economics anticipate that the divergence in monetary policies between the U.S. Federal Reserve and the PBOC will keep the yuan subdued in the first half of 2024. They project controlled depreciation, with the yuan unlikely to breach 7.34, a level last witnessed in September.
UBS strategists Rohit Arora and Teck Quan Koh also anticipate a shift in Beijing’s policy approach, akin to the yuan’s gradual 9% decline in late 2022, hinting at a managed adjustment process rather than a fully market-driven devaluation.
Amidst steady outflows from mainland stock markets and speculative plays, ongoing volatility in the yuan might necessitate PBOC intervention to maintain stability, typically via state banks.
One area of pressure stems from the yuan’s increasing role in ‘carry trades,’ where investors borrow in a low-interest-rate currency and invest in a higher-yielding one.
Rong Ren Goh, a portfolio manager at Eastspring Investments, notes that active policy guidance from PBOC is currently preventing significant yuan depreciation. Goh has leveraged the offshore yuan as a funding currency, pocketing gains from shorting the currency and investing in high-yield assets.
If you’ve held a long dollar-CNH position since the beginning of the year, you would have already earned more than 400 pips of carry and capital gains,” Goh said.
China yuan REER: https://tmsnrt.rs/3PFq9UB
(Additional reporting by Summer Zhen, Tom Westbrook and Reuters Shanghai bureau Writing by Vidya Ranganathan; Editing by Kim Coghill)
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