Offshore yuan declines to 5-year low as China central bank lowers fixing

[BEIJING] The yuan traded overseas fell to a five-year low after China's central bank cut the onshore daily reference rate to the weakest level since May 2011, adding to speculation that the authority is guiding a decline it focuses on rejuvenating economic growth.

The PBOC lowered its reference rate by 0.05 per cent on Wednesday to 6.4895, the weakest since May 27, 2011. That extends the reference rate's decline to 1.4 per cent since the currency won entry into the International Monetary Fund's reserves basket on Nov 30. The PBOC was seen propping up the yuan in the months leading to the IMF decision.

The People's Bank of China has become more hands-off of late and allowed a "significant depreciation" in December, Malayan Banking Bhd. strategists led by Saktiandi Supaat wrote in a note dated Tuesday (Dec 29). The yuan in Shanghai will probably drop 3.1 per cent by the end of 2016, according to the median forecast in a Dec 18-25 Bloomberg survey.

The freely traded offshore yuan slid 0.28 per cent to 6.5933 a US dollar as of 10:44 am in Hong Kong, according to data compiled by Bloomberg. It earlier declined to 6.5970, the weakest since Jan 10, 2011. The spot rate in Shanghai lost 0.08 per cent for the day and 1.42 per cent for the month to 6.4902, according to China Foreign Exchange Trade System prices. That extends the onshore currency's decline to 4.4 per cent this year, the most in CFETS and Bloomberg-compiled data going back to 1994.

"The PBOC has less incentive to prop up the yuan now and is guiding the currency lower through fixings, allowing the exchange rate to reflect China's weak fundamentals," said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd in Hong Kong.

"The offshore yuan will test the 6.6 level in the short-run. The PBOC won't likely intervene frequently next year as it seeks to make the currency more market-driven." The nation's manufacturing sector probably contracted for a fifth straight month in December, according to the median forecast in a Bloomberg survey. The official purchasing managers index is due to be released by the National Bureau of Statistics on Jan 1. Gross domestic product growth will slow from an estimated 6.9 per cent this year to 6.5 per cent next year, according to another Bloomberg survey.

BLOOMBERG