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China’s Yuan Tumble Past 7 May See Less Disruption This Time

While China’s mainland markets have been on holiday since Jan. 23, the yuan has been falling in offshore trading.

China’s Yuan Tumble Past 7 May See Less Disruption This Time
A man counts out Chinese one hundred yuan renminbi banknotes (Photographer: Andrey Rudakov/Bloomberg)

(Bloomberg) -- Less than six months after a slide in China’s yuan rattled global markets, the currency has again traded through the key psychological level that triggered wider stress.

While China’s mainland markets have been on holiday since Jan. 23, the yuan has been falling in offshore trading, and it sank through 7 per dollar Thursday. When it crossed that level in August, it spurred a tumble in everything from global stocks and emerging-market currencies to sovereign bond yields. The yuan had traded stronger than 7 since late December, as trade tensions eased.

This time, the yuan’s depreciation is less worrying, market participants say. Unlike last year, when the decline raised questions among some observers whether China was deliberately weakening the currency, this time it appears a reflection of worries about the economic impact of the deadly coronavirus. While the disease is a tragedy, the consensus is it will ultimately prove a short-term narrative for markets.

“In August, there were some concerns the authorities would use the exchange rate to offset the trade war” with the U.S., said Mansoor Mohi-uddin, a senior macro strategist at NatWest Markets in Singapore. “This time round the PBOC will still be expected to allow flexibility, but isn’t likely to use the exchange rate as a tool to offset what’s going on with the virus.”

China’s Yuan Tumble Past 7 May See Less Disruption This Time

For now, markets are without explicit cues from the People’s Bank of China, with domestic markets not scheduled to reopen until Feb. 3. The PBOC’s daily reference rate for the onshore yuan could then offer a first look at the central bank’s preference for the exchange rate.

Domestic traders will need to catch up with market moves since Jan. 23, when China’s markets were last open. The offshore yuan, which fell as low as 7.0038 in early London trading Thursday, is down about 1% since then. And futures on the FTSE China A50 stock have retreated more than 7% since then, suggesting significant selling pressure for equities.

“We still expect the renminbi to exhibit a weakening bias, and do not rule out the possibility of some outflow pressures” from China, said Terence Wu, a foreign-exchange strategist at Oversea-Chinese Banking Corp. in Singapore. “If macro stabilization is not de-railed, then we expect the equity and bond inflow momentum into China to remain resilient” once the epidemic subsides, he said.

Currency Pledge

This month’s U.S.-China phase-one trade deal -- which featured a commitment by Beijing to avoid currency manipulation -- is offering ballast that the yuan didn’t have last time around. Prospects for further domestic stimulus could also ensure that the hit to growth due to the epidemic proves short-lived.

The yuan’s slide in August, in the wake of President Donald Trump announcing a tariff hike on Chinese goods, triggered a raft of cuts to yuan forecasts among strategists. But so far no such fundamental shift has come.

JPMorgan Chase & Co. analysts, for one, said Jan. 27 they were standing pat for now, with a year-end target of 6.99 per dollar. Natwest’s year-end call is still at 6.97, said Mohi-uddin, who added that there’s even a possibility of a positive surprise for the currency this year if U.S.-China tariffs unexpectedly come down further.

Sustained Slowdown?

Things could still change. China’s economy is bound to see a sharp decline in retail-sales growth for at least this quarter as shops close to contain the deadly epidemic. Manufacturers are also shuttering operations, disrupting supply chains. Any hint of a sustained slowdown could alter expected trajectories for markets.

The exchange rate is particularly sensitive, not only because of scrutiny from the Trump administration, but also the destabilizing episode in 2015, when a messy devaluation sparked hundreds of billions of dollars in capital flight. Controls put in place since then have helped limit such moves, but the experience still looms large in the minds of China watchers.

“It would be surprising if Chinese investors are not inclined to increase capital outflows near term,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “But limiting outflows to shore up the yuan has been a high priority for the authorities in recent years, so yuan depreciation should be stemmed by official action before a test of, say, 7.15/7.20.”

To contact the reporters on this story: Christopher Anstey in Tokyo at canstey@bloomberg.net;Enda Curran in hong kong at ecurran8@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, ;Malcolm Scott at mscott23@bloomberg.net, Paul Dobson

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