China’s Yuan Weakness Shows in Record Slide Versus Peers

(Bloomberg) -- China’s currency has moved away from testing its 2008 low versus the dollar, but that’s not stopped the yuan from weakening against its peers.

The yuan has fallen for a record 16 straight days against a basket of trading partners’ currencies -- the longest run since the basket was created in 2015 -- and is close to erasing its gain versus those exchange rates this year, according to data compiled by Bloomberg. The yuan slumped more than 4% versus the euro and Australian dollar over that period, while it has strengthened about 0.4% versus the greenback.

The dollar has tumbled 4% over the past three weeks, which is a boon for Chinese authorities in that they can allow the yuan to fall against those of other exporter nations without causing alarm about depreciation. In late May, escalating tensions with the U.S. helped drag the yuan back to near its lowest level since the global financial crisis.

Beijing will likely allow such broad weakening by the yuan to continue, giving its exporters some relief amid the global economic shutdown. Bulls beware, however, there are a number of risks that could send the greenback surging again, pushing the yuan lower. Just a few days ago, Goldman Sachs Group Inc. forecast that capital outflows triggered by tensions with the U.S. could push the Chinese currency to its weakest level in more than a decade.

“The direction of travel is clear, and the momentum is accelerating,” said Sue Trinh, managing director for global macro strategy at Manulife Asset Management Ltd., adding the yuan could “easily” hit its weakest since 2008 in the event of worsening U.S-China relations. “Factors including weak external and domestic demand could also hurt the yuan.”

Here’s a look at the push and pull factors on the yuan in the near term:

Hong Kong and Pandemic

Washington has ramped up its rhetoric toward Beijing over its handling of the virus outbreak and its planned national security law for Hong Kong. President Donald Trump has also announced the U.S. would begin the process of stripping some of the city’s privileged trade status without detailing specifics. These issues “seem unlikely to be resolved soon,” according to Goldman strategists including Zach Pandl. Continued uncertainties could increase outflow pressures and send the yuan to 7.25 per greenback in three months, he added. The currency traded at 7.0751 per dollar as of 4:38 p.m. Monday in Shanghai.

Trade Deal

This can pull the yuan either way, depending on how China and the U.S. go about the agreement. While Mizuho Bank Ltd.’s chief Asian strategist Ken Cheung says a collapse of the deal could quickly send the yuan to 7.3 per dollar -- a level unseen since late 2007 -- ING Bank economist Iris Pang argues the currency could end the year at 7.05 if tensions don’t escalate in a dramatic manner. On Thursday, U.S. Trade Representative Robert Lighthizer said he feels “very good” about progress of the phase one trade agreement with China.

Sluggish External Demand

Global demand for Chinese goods will likely remain depressed as the world economy recovers from the pandemic slowly. That means mainland exporters will bring less foreign-exchange back home, limiting a major source of capital inflows. While a positive turn in the outlook could send the yuan stronger than 7, that won’t likely happen until the fourth quarter, according to Wei Liang Chang, a macro strategist at DBS Bank Ltd.

Dividend Season

The next three months will see Chinese enterprises in Hong Kong pay out dividends that total HK$448 billion ($58 billion), 20% more than the levels seen a year ago, according to Bloomberg calculations based on company’s announcements. July will be the peak of the handout season. That will put the yuan under heavier selling pressure as firms are going to get busy using it to buy the Hong Kong dollar.

A Weaker Dollar

One thing that may help the yuan is the weaker greenback. The dollar has declined for three weeks in a row, the longest run since October, as risk appetite returned amid signs that the pandemic is easing globally. A continuous slide in the greenback could send the Chinese currency to 7.05, said Fiona Lim, senior foreign-exchange analyst at Malayan Banking Berhad.

©2020 Bloomberg L.P.

With assistance from Bloomberg