Devaluation bets push yuan to three-month low as fixing weakened

[HONG KONG] The yuan fell to a three-month low as the central bank weakened the currency's reference rate amid a dollar advance and on concern China will allow a decline to help its economy.

The yuan is massively overvalued and needs to drop, David Tepper, the billionaire owner of Appaloosa Management, said at the Robin Hood Investor's Conference last week. His comments follow similar views from hedge fund managers including Crispin Odey, founder of the US$12 billion Odey Asset Management, who predicts China will devalue by at least 30 per cent. A Bloomberg dollar gauge rallied, bolstered by comments from Federal Reserve officials about the prospect of a December interest-rate increase.

The yuan declined 0.07 per cent to 6.3894 a dollar as of 10:22 am in Shanghai, China Foreign Exchange Trade System prices show. It fell to 6.3955 earlier, the lowest since Aug 28. In Hong Kong's offshore market, the currency slipped as much as 0.21 per cent to a two-month low of 6.4352. The central bank earlier cut the onshore yuan's daily fixing, which limits the yuan's moves to 2 per cent on either side, by 0.14 per cent to 6.3867, the weakest since Aug 31.

"The weaker fixing and the prospect of a higher US interest rate are weighing on the yuan today," said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong.

"Investors are still quite bearish on the yuan given the weak economic fundamentals."

Data on Chinese manufacturing, trade and new local-currency loans for October trailed expectations, adding to concern that the world's second-largest economy is slipping deeper into a slowdown even after six interest-rate cuts in the past year. The People's Bank of China surprised investors on Aug 11 with a devaluation of the currency and a switch to a more market-oriented fixing regime.

The yuan will be kept basically stable at a reasonable and balanced level even after it is granted Special Drawing Rights status by the International Monetary Fund, PBOC Deputy Governor Yi Gang was cited as saying in a South China Morning Post report. The nation is remaking its monetary policy framework to rely more on "the price tools" of interest and exchange rates, the newspaper cited Mr Yi as saying.

IMF managing director Christine Lagarde said on Nov 13 that her staff have recommended the yuan be included in the SDR basket, along with the dollar, euro, British pound and yen. The decision will need approval from the IMF executive board, which is expected to meet on Nov 30.

BLOOMBERG