Yuan drops most since August, losses mount in extended trading

[BEIJING] China's yuan fell the most since August, hastening its decline in extended trading hours on speculation the authorities stopped supporting the currency late in the day.

While trading will carry on till 11:30 pm from Monday, the central bank will continue to use the 4:30 pm price as the closing level, it said last month. This is significant because the monetary authority's new system of setting the yuan's daily fixing uses the previous day's close as one of the factors. Major Chinese banks, which tried to sell dollars during most of the day, significantly reduced their offerings after 4 pm, according to two currency traders.

Since the official close of 6.5172 per dollar, the yuan extended declines by 0.29 per cent to 6.5350 at 8:27 pm in Shanghai, bringing the drop on Monday to 0.65 per cent, according to China Foreign Exchange Trade System prices. The currency traded in Hong Kong's offshore market fell 1 per cent to a five- year low of 6.6348.

"The central bank's tolerance for a weaker yuan is much higher now as it wants to make the currency more market-driven," said Xia Le, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA. "The longer trading hours will help narrow the gap between the yuan's exchange rates in Shanghai and Hong Kong. That's because the onshore rate will be available during the European session, so it'll have a bigger influence on the offshore unit."

Liquidity outside of regular Asia hours can be relatively poor, heightening the risk of unrepresentative exchange rates and manipulation, the People's Bank of China said while announcing the extended trading hours in December. The nation aims to provide more channels for trading of the yuan, which will help converge the currency's onshore and offshore rates, the PBOC said.

The PBOC cut its reference rate for the yuan by 0.15 per cent to 6.5032 a dollar on Monday, the weakest since May 2011. The monetary authority has reduced the reference rate by 0.49 per cent in the past five sessions.

"The trend for the yuan to weaken is continuing in the new year as the PBOC weakens the currency's fixing," said Eddie Cheung, a Hong Kong-based currency strategist at Standard Chartered Plc. "The currency will drop further in the first quarter as China makes the exchange rate more market-driven." The nation's policy will lean toward "a loosening bias" in 2016, as more supportive measures could provide a buffer to slower growth, Goldman Sachs Group Inc. economists led by Maggie Wei wrote in a note.

The official purchasing managers index was at 49.7 last month, below the 50 level that separates contraction and expansion, compared with the median estimate of 49.8 in a Bloomberg survey of economists. The survey-based Caixin China Manufacturing PMI index released Monday also indicated deterioration, coming in at 48.2.

BLOOMBERG