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Yuan pares biggest monthly loss since 1994 as Li talks stability

Monday, August 31, 2015 - 18:30

[BEIJING] China's yuan rose for the fourth day, trimming the biggest monthly loss since 1994, after Premier Li Keqiang signaled support for the currency following a devaluation that rattled global markets and shook confidence in the world's second-largest economy.

The yuan climbed 0.19 per cent to close at 6.3763 a dollar in Shanghai, according to China Foreign Exchange Trade System prices. That takes its advance in the past four sessions to 0.6 per cent and pares its loss for August to 2.6 per cent.

There's no basis for yuan declines to continue, Li said late last week. Using words such as "basically stable" and "reasonable and equilibrium level," he added to efforts to calm investors after a period of depreciation tested the central bank's commitment to a new, more market-driven exchange-rate system.

"The government's verbal interventions have improved market sentiment," said Tommy Xie, an economist at Oversea-Chinese Banking Corp in Singapore.

"Investors are confident the authorities have the capability to stabilize the yuan at around 6.4 against the dollar as the stock market is in turmoil."

Policy makers are trying to balance the need for financial stability with a desire for stronger exports and the yuan's inclusion in the International Monetary Fund's basket of reserve currencies. Keeping the yuan stable dented the competitiveness of shipments and contributed to a US$315 billion decline in foreign-exchange reserves in the year through July.

The Shanghai Composite Index of equities plunged 12.5 per cent in August amid concern about a slowing economy and the level of government support. The central bank cut its benchmark interest rates for the fifth time since November last week and lowered lenders' reserve-requirement ratios.

The People's Bank of China strengthened the yuan's reference rate by the most in five months on Friday, a move that suggested policy makers were trying to "save face" before a Sept 3 parade to celebrate victory in World War II, according to Brilliant and Bright Investment Consultancy Ltd.

The PBOC raised the fixing, which restricts the onshore spot price's moves to 2 per cent on either side, by another 0.15 per cent Monday to 6.3983 a dollar.

The increases raise questions about policy makers' role in determining the level. The PBOC said on Aug. 11 that it was adopting a new methodology for setting the official rate, and that market makers who submit contributing prices would have to consider the previous day's close, foreign-exchange demand and supply, as well as changes in major currency rates.

The onshore yuan will decline to 6.5 versus the greenback by the end of 2015, according to the median estimate in a Bloomberg survey. Before the PBOC's surprise devaluation, the currency was forecast to end the year at 6.2. The currency's one-month implied volatility, which measures expected swings and is used by some traders to price options, jumped 434 basis points from July 31, the biggest monthly advance since 2005, to 5.85 per cent as of 5:23 pm in Hong Kong, according to data compiled by Bloomberg.

The freely-traded offshore yuan in Hong Kong rose 0.26 per cent to 6.4463 a dollar on Monday, according to data compiled by Bloomberg. That trims its decline for the month to a still- unprecedented 3.5 per cent.

China will continue to carry out proactive fiscal and prudent monetary policies and will use "more precise" measures to cope with downward pressure on the economy, Li said in comments posted on the State Council website on Saturday. Hong Kong's end-July yuan deposits rose 0.1 per cent from the previous month to 994.1 billion yuan (US$156 billion), the city's de facto monetary authority said on Monday.

"The PBOC clearly doesn't want the yuan to depreciate sharply now as the stock market is too volatile and they signaled the adjustment of the currency's exchange rate was almost done," said Banny Lam, co-head of research at Agricultural Bank of China International Securities in Hong Kong.

"The yuan still faces the pressure of another 2-3 per cent decline this year as the economic fundamentals remain weak."

BLOOMBERG