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China holds line on yuan, stocks remain fragile
[SHANGHAI] China's central bank held the line on its yuan for a fourth straight session on Wednesday while putting the squeeze on offshore sellers of the currency, calming fears of a sustained depreciation - at least for now.
Having been alarmed by a near 5 per cent slide in the yuan since August, investors globally appeared relieved by the stabilisation overnight, bidding up share markets and proxies for the yuan in currency markets, such as the Australian dollar, while knocking back the safe-haven yen.
Forecast-beating Chinese trade data for December released on Wednesday also helped broader sentiment, tempering some of the fears about the slowdown in the world's second largest economy.
The People's Bank of China (PBOC) set the mid-point for the yuan at 6.5630 to the dollar, little changed from firm fixes on the previous two days. The onshore spot rate weakened a little to 6.5790 from the overnight close of 6.5756, but offshore the yuan had strengthened to 6.5731 just after midday.
The central bank has used aggressive intervention to force a huge leap in yuan borrowing rates in Hong Kong, essentially making it prohibitively expensive to speculate against the currency.
The implied overnight borrowing rate shot over 90 per cent on Tuesday, and while it had moderated to around 10 per cent on Wednesday, the central bank's signal was clear. "We believe China is sending a strong message to speculators and trying to stabilize RMB depreciation expectations," HSBC said in a research note.
The result has been to drag the offshore level of the yuan back toward the official onshore level, closing a gap that had threatened to get out of control just a few days earlier.
HSBC said it expected the PBOC would allow the onshore rate to continually adjust in line with its commitment to a more flexible currency regime, and would periodically intervene to squeeze out speculators when the offshore rate strays too far. "High volatility will be the theme for 2016," it added.
Despite brighter trade data and a steadier yuan, domestic equity markets struggled to hold on to early gains.
The Shanghai Composite Index ended the morning session flat, while the CSI300 index was up 0.2 per cent.
That still compares favourably with their performance so far in 2016, having lost 13-14 per cent after several volatile sessions.
Perceived mis-steps by the authorities and the wild swings on the forex and equities market had stoked concerns that Beijing might be losing its grip on economic policy, just as the country looks set to post its slowest growth in 25 years.
China is expected to post its weakest economic growth since the global financial crisis in the fourth quarter, when it releases gross domestic product data in Jan. 19. A Reuters poll of economists forecast growth slipping to 6.8 per cent from 6.9 per cent in the third quarter.
The World Bank has forecast growth would slow from 6.9 per cent in 2015 to 6.7 per cent this year.
The trade data released during the morning showed exports denominated in dollars fell much less than expected and in yuan terms actually rose, which could be an early indication that the depreciation of the yuan has helped exporters.
A customs spokesman said the impact would weaken over time, however, and China faced challenges in 2016 due to weak external demand.
Imports also fell less than expected, and the volume of imports of copper, iron ore, crude oil, coal and soybeans all rose in December from the preceding month.
Nomura said the data offered a sign of the economy stabilising, albeit at a low level. "Nevertheless, we still expect growth to resume a downtrend later in the year, given ongoing structural headwinds," it added.