PBOC seen quitting yuan support by end-2015 as reserves shrink

[BEIJING] China's central bank will have to step back from supporting the yuan by early December and allow the currency to decline, given the current strain on foreign- exchange reserves, according to Rabobank Group.

The nation has to keep at least US$2.7 trillion in hand to avoid any potential shortfalls, considering it needs US$1 trillion to pay for six months of goods imports and US$1.7 trillion to service external debt, Michael Every, head of financial markets research at Rabobank in Hong Kong, wrote in a note Tuesday. The stockpile will shrink by US$40 billion a month for the rest of 2015, partly due to efforts to prop up the yuan, according to a Bloomberg survey conducted in August.

"The pile may already have dropped by as much as $200 billion in the last few weeks of August," Mr Every said, adding that he expects the yuan to decline to 7 against the greenback by the end of this year, from about 6.4 now. "In 2016, if China's economic fundamentals do not improve and the US continues to tighten monetary policy, then a further slide to as far as 7.50 and beyond is not out of the question." The People's Bank of China has set stronger daily reference rates for the yuan and intervened in the spot and swap markets to prop up the currency since an Aug 11 devaluation. It has also imposed a 20 per cent reserve requirement on financial institutions trading in foreign-exchange forwards for clients, effective Oct 15, according to people familiar with the matter. The value of yuan forwards transactions was US$51.1 billion in July, compared with US$698 billion in the spot market.

"The new rule makes speculating on the yuan's decline more expensive in the foreign-exchange forwards market," said Banny Lam, co-head of research at Agricultural Bank of China International Securities in Hong Kong. "This is a new signal the PBOC has sent, on top of stronger fixings, that it prefers a stable yuan and the currency's one-off devaluation is over." The onshore yuan, which can trade a maximum 2 per cent on either side of the PBOC's fixing, was little changed 6.3651 as of 11:14 am in Shanghai on Wednesday, according to China Foreign Exchange Trade System prices. It rose 0.74 per cent in the five days through Tuesday after plunging 3 percent in the three days following the devaluation. The freely-traded offshore yuan in Hong Kong declined 0.18 per cent to 6.4356, data compiled by Bloomberg show.

The PBOC on Wednesday raised its daily fixing by 0.21 per cent to 6.3619 a dollar, the strongest level since Aug 12. That brings its four-day increase to 0.7 per cent. Chinese financial markets will be closed Thursday through Sunday as the nation celebrates the victory in World War II.

China's foreign-exchange reserves, the world's biggest stockpile, have slumped US$315 billion in the year through July to US$3.65 trillion. Bloomberg Intelligence estimates that every 1 per cent drop in the yuan triggers about US$40 billion of outflows.

BLOOMBERG