China's yuan slides to near one
HONG KONG (Reuters) - China's yuan fell beyond 6.20 to the dollar on Wednesday for the first time since April last year amid market speculation the central bank will keep the currency weak as economic growth slows.
The yuan has tumbled 0.8 percent so far this week after the People's Bank of China (PBOC) on Saturday doubled the daily trading band allowed for the currency to 2 percent from the mid-point that it sets each day.
Spot yuan briefly fell as low as 6.2040 in early afternoon trade before ending at 6.1965. That marked a 0.07 percent loss on the day from Tuesday's close, and a fall of 1 percent from the mid-point.
'We see risks of further near-term yuan weakness, but do not expect this to extend beyond the second quarter. It is not in the PBOC's interests to have a sustained depreciation in the currency, as this will increase financial stability risks,' economists at ANZ said in a research note.
Other analysts agreed that allowing the yuan to weaken too far, too fast would only increase the stresses on Chinese companies and the broader economy.
ANZ expects the currency to return to a modest appreciation trend in the second half, but still end the year weaker for the first time since Beijing unshackled it from its fixed exchange rate to the dollar in 2005.
The currency has risen more than 30 percent since then, attracting a growing number of global investors, big and small, many of whom have come to see it as a one-way appreciation bet.
ANZ like many other market watchers has now dialed back expectations for the yuan, revising its year-end yuan forecast to 6.08 from 5.98.
'The yuan may not appreciate this year given China's weak economy,' agreed one trader in Shanghai. 'The return of yuan strength will not only rely on when the economy bottoms out, but when fresh long yuan funds come in.'
While the recent slide in the yuan is widely seen as a move engineered by the central bank to punish speculators, it has coincided with heightened anxiety among global investors that long-standing risks in China may be coming to a head.
The economy clearly lost steam in the first two months of the year and rising debt worries following the country's first domestic bond default are adding to pressure on its currency and stock markets. A flurry of local media reports of troubled steel and property companies have compounded market jitters.
Some traders suggested the yuan's decline may reflect policymakers' desire to offer some help to the sluggish economy, by effectively easing monetary conditions, while others said that may only be a welcome side-effect of the PBOC's move to deepen market reforms.
Speculation that Beijing may soon announce stimulus measures for the economy has grown since data last week showed growth in investment, retail sales and factory output all falling to multi-year lows.
'The currency band widening at this moment has two advantages. One is to signal that the reform agenda will not be easily given up despite weak economic condition. Second, while band widening itself has little impact on the economy, the possible consequence could be used to stabilize growth,' said Zhu Haibin, an analyst at JP Morgan.
However, not all traders subscribe to that view. Others said the yuan's decline reflected genuine trade as investors reduced long positions in the currency as the PBOC looks to implement deeper reforms.
They pointed to the fact that just two days into the 2 percent band regime, the market had already moved the currency by the equivalent of the previous band's 1 percent limit.
When the band was last widened in 2012 - to 1 percent from 0.5 percent - it took the market two weeks to build up the courage to test even the previous band's width given how closely the central bank controls the market.
Indeed, in recent weeks sentiment on the Chinese yuan had already turned bearish for the first time since mid-2012 as the PBOC rounded on speculators and looked to curb hot money inflows, a Reuters poll showed last week.
A weaker currency could also work against exporters if it also grows more volatile, raising their hedging costs.
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