China's yuan plunges most since aftermath of devaluation in 2015

[HONG KONG] China's yuan extended declines, sinking the most since the aftermath of the shock devaluation of the currency in August 2015, after trade figures missed estimates and amid speculation policy makers will step up efforts to rein in gains.

The onshore spot rate weakened 0.7 per cent to 6.3375 against the US dollar as of 12.59pm in Shanghai, after dropping as much as one per cent earlier. The currency extended losses after China reported a much narrower trade surplus than expected, on the back of a jump in imports. Volatility surged, and the gap between onshore and offshore rates tripled compared with the same time on Wednesday.

The yuan's climb to a two-year high this week had fuelled speculation officials may seek to curb one-way bets, and that they will grow more tolerant of capital outflows:

- The foreign-exchange regulator said Wednesday that it sees "more noticeable" two-way yuan moves

- A front-page Economic Daily commentary on Thursday said more fluctuations are likely

- The country has resumed its Qualified Domestic Limited Partnership plan after a two-year halt, granting licenses to about a dozen global money managers that can raise funds in China for overseas investments, Reuters reported on Thursday, citing people it didn't identify.

"Market has been on PBOC watch for a while, which means fearing interventions or regulations," said Dariusz Kowalczyk, a senior emerging-market strategist at Credit Agricole.

Here's what other strategists made of the sudden slump:

Tommy Xie, an economist at OCBC Singapore:

"Today's trade surplus worked as the key catalyst for the long yuan positions to square. With SAFE's (State Administration of Foreign Exchange) Pan saying all capital control measures rolling back to neutral and Economic Information Daily's warning on one-way movement of yuan, traders are scaling back their bets."

Ken Cheung, an Asian FX strategist at Mizuho Bank:

"The slide of the yuan today is triggered by the unexpected decline in China's trade surplus. As previously market view was very one-sided to favour yuan, the negative data should have led to adjustment of extreme long-yuan positions."

"Besides, the reported resume of QDLP program also signal China has started to relax control on outflows, in a bid to cut appreciation bias."

Sim Moh Siong, currency strategist at Bank of Singapore:

"My take is it's a combination of factors including stronger dollar, the nervousness in the equity market and the heavy positioning accumulated earlier that's caused the decline. The way USD/CNY has moved recently indicated there's quite heavy long yuan positions recently and in light of equity market and dollar rebound, that's probably led to some position liquidation."

"The trade surplus and the news about resuming the QDLP could be a factor, but I'm not sure they're the main driver. Actually I don't think the trade data is that surprising, as it's very difficult to forecast after all, so I'm hesitant to read too much into it."

BLOOMBERG