Yuan Set for Biggest Monthly Drop Since August 2015 Devaluation

(Bloomberg) -- The yuan headed for the biggest monthly drop since last year’s shock devaluation, spurring concern that China’s policy makers are becoming more tolerant of declines as exports slump and the dollar advances.

The currency traded in Shanghai’s spot market fell 1.6 percent so far this month to 6.7808 a dollar as of 6:11 p.m. That’s the most since the People’s Bank of China unnerved global markets by weakening its exchange rate 4.4 percent in three days in August 2015. The offshore rate, which dropped to a record low this week, retreated 1.7 percent from Sept. 30. Both rates were little changed for the day Friday.

The accelerated declines have prompted a verbal pushback from Chinese officials and state-run media. The exchange rate isn’t likely to drop much more because a rally in the dollar is close to an end, according to a report Thursday in the Financial News, a central bank publication. The article follows comments from PBOC Deputy Governor Yi Gang that the nation will keep the exchange rate stable. Yuan bears express doubt over the assertions, saying that the monetary authority can’t control the dollar’s moves.

“We keep hearing that there’s no basis for it to decline; and it keeps declining," said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. He expects the onshore yuan to end the year at 6.85 a dollar. “If they don’t want it to decline, then raise interest rates, or intervene. Otherwise, markets will decide on value.”

China’s monetary authority, which has often been suspected of stepping into the markets directly, retains control by limiting daily moves to 2 percent on either side of a reference rate. Previous rounds of verbal intervention have preceded an escalation of meddling in the currency market. In January, the PBOC was suspected of starving the offshore market of yuan soon after a central-bank arm said there was no basis for depreciation. Still, officials have also proven themselves capable of surprises. On Aug. 13 last year, the PBOC cut its fixing by 1.1 percent a day after saying there’s no reason for a persistent drop.

"In the very near term, China has sealed the fate of the yuan - lower,” said Sue Trinh, head of Asia foreign-exchange strategy at RBC Capital Markets in Hong Kong. “I have argued for a long time that the game changer would be structural reform to increase productivity."

A gauge of the dollar’s strength has climbed 2.5 percent since the end of September as investors speculate that the U.S. Federal Reserve is readying an interest-rate increase. The speed of the yuan’s recent tumble will slow, and policy makers will step in to squeeze out speculators if bearish bets increase, according to a Bloomberg survey of 21 foreign-exchange traders and analysts this month, with the median forecast seeing the yuan declining to 6.8 per dollar by year-end.

The case for limited depreciation in the yuan has been buttressed by its Oct. 1 entry into the International Monetary Fund’s Special Drawing Rights, which is expected to draw capital inflows.

The Chinese currency’s share of global payments surged to 2.03 percent in September, the highest since January, according to data from the Society for Worldwide Interbank Financial Telecommunication. The nation’s exports unexpectedly shrank the most in seven months in September, according to official data.

--With assistance from Justina Lee and Adrian Leung To contact Bloomberg News staff for this story: Tian Chen in Beijing at tchen259@bloomberg.net. To contact the editors responsible for this story: Sarah McDonald at smcdonald23@bloomberg.net, Robin Ganguly, Philip Glamann

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