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Friday, September 9, 2016, 10:40

Yuan depreciation will be ‘slower and milder'

By lin wenjie in Hong Kong
Yuan depreciation will be ‘slower and milder'

RMB exchange rate (per US dollar ). Source: The people's Bank of China (Photo provided to China Daily )

The onshore yuan declined 0.6 percent in August, while the currency traded in Hong Kong fell 0.9 percent in the same month, with depreciation bets mounting as the US Federal Reserve prepares to increase interest rates and the Chinese mainland’s economy shows signs of cooling.

The retreat has strengthened market expectations that further depreciation of the mainland currency is on the horizon. Economists believe that once the mainland cuts interest rates to boost the economy — or, as is widely expected, the US raises rates later this year — the yuan will depreciate further, but in a milder way.

JP Morgan said in a research note released on Aug 12 that the worst time for the yuan had passed, and the pace of its depreciation will be slower in the second half of 2016, with year-end onshore yuan (CNY) to the greenback forecast at 6.85.

“China’s gross domestic product picked up in the second quarter and the current account surplus remains decent. With the fundamentals having stabilized, the risk of a significant near-term CNY depreciation remains low — while gradual, moderate depreciation appears to be the most likely scenario in the second half,” the report said.

Yuan depreciation will be ‘slower and milder'

Left: Currencies used for cross-border payments with HK and the mainland. Right: Weights of currencies in the new SDR basket. Source: SWIFT (Photo provided to China Daily )

CNH seen moving in same direction

JP Morgan noted that the offshore yuan (CNH) will move in a similar direction to CNY. “Although the gap between the CNH and CNY spot exchange rate has narrowed, it will not disappear in the short term until the capital account convertibility is fully realized,” added JP Morgan emerging Asia foreign exchange and rates strategist Gu Ying, who is one of the co-authors of the report.

Citibank expects the yuan to depreciate to 6.71 by year-end, due to potential monetary easing measures to be taken by China’s central bank to buoy slowing growth in the economy.

“China’s central bank is likely to cut the reserve requirement ratio by three times for the rest of the year, each by 50 basis points, and there’s the possibility that the central bank will cut interest rates,” said Catherine Cheung, head of investment strategy and portfolio advisory at Citibank Global Consumer Banking. “But, a sudden depreciation like what happened in August last year is unlikely.”

China’s economic growth held steady at 6.7 percent in the second quarter of 2016, as a buoyant property market and government stimulus boosted demand for factory output. However, the downward pressure on the economy remains significant as fixed-asset investment only grew at the slowest pace since 2000 in the first six months.

It has been one year since the central bank reformed the CNY exchange rate regime. It devalued the yuan’s fixing rate by 1.9 percent on Aug 11 last year to fix the discrepancy between the reference rate and actual spot rate in the market. Since then, the yuan has depreciated against the US dollar by 6.9 percent.

Following the depreciation trend, Hong Kong saw a liquidity crunch in its offshore yuan pool, and a decline in the issuance of dim sum bonds.

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