The yuan at 7 per dollar? No time soon, say China watchers

Chinese one-hundred yuan banknotes in Hong Kong, China. (Bloomberg pic)

SHANGHAI: The dramatic decline in China’s currency is about to decelerate, according to the respondents in a Bloomberg survey.

Only one of 20 traders and analysts surveyed said the yuan will fall below 7 per dollar in the next three months, a milestone level that was last crossed more than a decade ago. Their median year-end estimate was 6.7750, the survey carried out on Monday and Tuesday found. That’s slightly stronger than where the yuan’s trading now. The People’s Bank of China was said to meet with lenders on Monday in the latest effort to support the currency, and the offshore yuan rallied after the news broke.

If the respondents are right, that would be a welcome reprieve for policymakers seeking to quell the risk of capital outflows seen when China’s currency weakened in 2015-16. The yuan sank for the past eight weeks, a record losing streak, before a policy change late on Friday by the PBOC that effectively made the currency costlier to short.

“History shows the change can at least help to stabilize the yuan’s exchange rate versus the dollar temporarily or even correct the slump a bit,” said Li Liuyang, Shanghai-based analyst at China Merchants Bank Co., who forecasts a gain to 6.5 by year-end. “The 6.9 level will be very difficult to breach within the next one or two months. However, to see a complete U-turn, there needs to be fundamental support from trade negotiations, export data and the dollar index.”

The pronounced weakness in China’s currency since June — both against the greenback and a basket of trading peers — has come amid escalating trade frictions with the US, concern over a slowing economy and easing measures by the government.

The PBOC on Monday urged the banks to prevent any “herd behaviour” and momentum-chasing moves in the foreign-exchange market, according to people familiar with the matter. The central bank has plenty of tools to stabilize the market, will keep the yuan flexible and allow it to move in both directions, the people said. The onshore yuan, which has slumped 6.7% in the past three months, begins trading at 9.30 am.

Sheng Songcheng, a senior adviser to the PBOC, said in an article in the Economic Observer on Monday the yuan won’t weaken past 7 versus the greenback because it’s such a strong psychological level. Chinese officials, including PBOC Governor Yi Gang voiced support for the yuan in early July, a move that helped the currency rebound. Those gains were soon erased after President Donald Trump announced a huge new round of potential tariffs.

Bloomberg’s survey involved 13 strategists and economists based in Hong Kong, Shanghai and Singapore, and seven currency traders at onshore banks. Other survey respondents who agreed to be identified were from Scotiabank, Mizuho Bank Ltd., Oversea-Chinese Banking Corp., Standard Chartered Plc, Banco Bilbao Vizcaya Argentaria SA, Commerzbank AG, DBS Bank Ltd., Australia & New Zealand Banking Group Ltd.

Here’s what some of them said about the yuan, while others asked not to be named because they’re not authorized to speak with the media.

Bank of Singapore Ltd. ( Moh Siong Sim, FX strategist)

The yuan’s weakness mainly comes from the trade tensions, and the economic slowdown is more manageable compared with 2015-2016 In the previous round of depreciation, forwards spiked — a sign of instability — but this time, they’re going the other way, so the situation isn’t as bad as back then.

United Overseas Bank Ltd. ( Heng Koon How, head of markets strategy)

The pace of weakening over the past two months has been too excessive, and some consolidation around the 6.80 to 6.90 level is in order. Over the medium to longer term, further yuan weakness is likely; key negative drivers are further US rate hikes, the trade conflict and deteriorating yield advantage.

National Australia Bank ( Christy Tan, head of markets strategy)

China will be reluctant to bear the costs of excessive yuan weakness, as falling beyond 7 could result in a disorderly financial market. Most importantly, China’s drive to advanced economy status, financial reforms and yuan internationalization may be derailed should the currency go into a downward tailspin. Should negative surprises happen, such as tariff impositions on US$500 billion worth of Chinese imports or the dollar index rising above 100, 7 is just another number and can be easily breached.

ING Bank NV ( Iris Pang, economist)

The PBOC has hinted it will take more measures, such as the counter-cyclical factor when setting the daily fixing, to slow depreciation if the reserve requirement on forwards doesn’t work. The central bank would try to avoid the yuan crossing 7 in a quick slump, which could induce worries over capital outflows, but a slow and orderly weakening toward 7 should be fine. The key is the speed, not the level.