Yuan estimates slashed at Goldman, CICC as PBOC's grip loosens

[MUMBAI] At least five banks and brokerages cut their yuan estimates in the past two days after the central bank's weakening of its reference rate fueled speculation China is becoming less willing to support its currency.

Goldman Sachs Group Inc, Standard Chartered Plc, ABN Amro Bank NV, Macquarie Bank Ltd and China International Capital Corp slashed their forecasts for the yuan, which slumped to a five-year low on Thursday. ABN Amro, which Bloomberg data show was the most-accurate yuan forecaster over the last four quarters, said the depreciation has triggered market concerns that the People's Bank of China is seeking a devaluation.

The cut in fixings suggests a possible shift in policy makers' "reaction function, that is an increased willingness to allow currency depreciation in light of disappointing exports and general economic conditions," Goldman Sachs economists led by Andrew Tilton and Yu Song wrote in a note to clients Friday.

The year 2016 "will be a year of continued 'bumpy deceleration' and significant policy easing in the Chinese economy," they wrote, adding that "the potential for greater yuan depreciation remains a large source of uncertainty."

The PBOC kept investors guessing as it supported the exchange rate from March to August, shocked global markets with its yuan devaluation in August and then spent billions of dollars to prop up the currency amid a successful bid to win reserve status at the International Monetary Fund on Nov 30. The yuan weakened 4.5 per cent in 2015, the biggest decline in data going back to 1994.

China's foreign-exchange reserves shrank by a record US$108 billion to US$3.33 trillion in December, the PBOC said Thursday. The central bank ended an eight-day run of reductions to the yuan's reference rate, setting it slightly stronger on Friday. That may be a sign of a stricter adherence to the mechanism announced in August, when it said it will make the exchange rate more market-driven, according to Goldman Sachs.

The yuan traded little changed at 6.5920 a dollar as of 7:33 pm in Shanghai Friday. Macquarie slashed its one-month prediction for the currency to 6.7 from 6.43, while Goldman cut its 12-month forecast to 7 from 6.60. ABN Amro sees the yuan weakening to 6.70 by year-end, compared with a previous forecast of 6.55, while CICC now predicts a drop to 6.87. Standard Chartered estimates a decline to 6.56 versus 6.42 earlier.

The currency will end the year at 6.65 a dollar, according to the median estimate in a Bloomberg survey. That compares with a projection of 6.60 on Dec 31.

BLOOMBERG