The yuan’s continued fall against the US dollar and the central bank’s lack of intervention in the exchange rate signal Beijing is taking a new tack to prepare for any turbulence from a US Federal Reserve interest rate hike, analysts said on Thursday.
The yuan weakened to its lowest level in eight years against the US dollar in the onshore market on Thursday after a Fed statement on Wednesday reinforced market expectations of an interest rate increase next month.
Xie Yaxuan, chief macro analyst at China Merchants Securities in Shenzhen, said the central bank appeared to be steering clear of intervention.
“We haven’t yet noticed any special move by the central bank [to intervene], nor should it make any such move,” Xie said. “It should focus on maintenance of the mechanism, and leave the rest to the market.”
Despite repeated pledges to let market forces decide the yuan’s exchange rate, the People’s Bank of China (PBOC) stepped into the market earlier this year to avoid a big fall in the currency.
In addition, when Reuters reported forecasts five months ago that the yuan would weaken to 6.8 against the US dollar by the end of this year, the central bank hit back, saying such reports aided forces “shorting” the yuan, and threatening to take legal action.
But the PBOC has become more relaxed about yuan depreciation over the past few weeks. The mid-price of the yuan against the dollar was set at 6.9085 yesterday, and the central bank said the Chinese currency should not be measured by just the greenback but also a basket of currencies.
Li Daokui, a Tsinghua University professor and a former member of the PBOC’s monetary policy committee, said the yuan could depreciate 3-5 per cent next year against the US dollar, an amount roughly equivalent to the gap between risk-free interest rates in the two countries.
But at finance magazine Caijing ’s annual conference last week, Li warned that an exodus of China’s vast domestic liquidity, about US$21 trillion, could easily wipe out the foreign exchange reserves and cause big swings in exchange rates.
After burning through more than US$800 billion in forex reserves to support the yuan exchange rate, the PBOC is allowing a fall in the currency.
But the yuan’s fall in recent weeks is partly a result of a strong US dollar. The US dollar index has jumped 5 per cent since Donald Trump won the presidential election two weeks ago.
Zhang Ming, a senior researcher at the Chinese Academy of Social Sciences’ institute of world economics and politics, said the value of the dollar might have peaked, leaving little chance for a further fall in the yuan.
“There are questions on whether Trump can fulfil his campaign promises and the long-term effect of larger fiscal spending,” Zhang wrote.