China's yuan at weakest in more than a year as selloff accelerates

Reuters

By Saikat Chatterjee HONG KONG, March 20 (Reuters) - China's yuan plunged to its weakest levels against the dollar in more than a year on Thursday as investors increased selling having interpreted signals from the central bank that it was comfortable with the fall.

The yuan has tumbled more than 1.2 percent so far this week and is set for its biggest weekly loss since 1992 after the People's Bank of China at the weekend doubled the yuan's trading range to 2 percent either side of the midpoint it fixes daily.

Aimed at injecting more two-way volatility into the currency market, markets read the central bank's action as a sign that it was willing to tolerate more yuan weakness in the short term after it engineered a dramatic fall in February to flush out one-way betting by speculators who had been expecting the yuan to gain.

"The yuan will remain weak in the coming three months and it will not be a surprise if it depreciates by 0.5 to 1 percent," said a trader at a Chinese Bank in Shanghai.

The yuan opened at 6.2080 per dollar and fell as far as 6.2334, its lowest since Feb 25, 2013 before recovering partially to close at 6.2275.

The yuan had closed trade on Wednesday at 6.1965.

Sending another signal to the market, the central bank set Thursday's midpoint at 6.1460 per dollar, the lowest since last November and down from Wednesday's 6.1351.

The yuan is down nearly 3 percent so far this year, having risen for the previous four years. One-year offshore forwards, or non-deliverable forwards, are suggesting the yuan will fall to 6.23 per dollar in a year.

OVERDONE? A run of disappointing data shows China's economy has lost steam at the start of 2014, and the country's first domestic bond default and subsequent media reports of trouble at other companies has added to pressure in its financial markets.

Some analysts are now worrying about how the weaker yuan will affect companies which have loaded up on foreign currency debt in recent years. Companies in the property sector, industrials and energy are among the most vulnerable to any sharp depreciation, Morgan Stanley analysts said.

Others say the yuan's weakness may be overdone.

"If you look at the fundamentals, China is as strong as it can get, said Kelvin Tay, regional chief investment officer of wealth management at UBS in Singapore, listing China's foreign exchange reserves of $3.8 billion, its external surpluses and low foreign debt relative to GDP.

Premier Li Keqiang said China will speed up investment and construction plans to ensure domestic demand expands at a stable rate - an indication authorities are considering practical measures to support slackening economic growth. ID:nL3N0MH1CS] But concerns of a hard landing for the economy mounted in recent days, resulting in sharp falls in China focused assets, with an index tracking mainland enterprises traded in Hong Kong now more than 20 percent off a Dec. 2 high.

Tay reckoned those fears for the economy were overdone.

"Anyone who is panicking over that should seriously look at and rethink why they are panicking." The onshore spot yuan market at a glance: PBOC midpoint 6.146 6.1351 -0.18% Spot yuan 6.2275 6.1965 -0.50% Divergence from midpoint* 1.33% Spot change ytd -2.79% Spot change since 2005 revaluation 32.90% *Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET In the offshore market, the yuan, or the "CNH" as it is commonly known, weakened past the 6.20 per dollar line in line with the weakness in the market precipitated on concerns of the presence of large derivative products.

Traders said the slide in the offshore yuan has left it at critical levels for holders of an offshore derivatives product, exposing them to heavy losses that may fuel a further slide in the currency.

The offshore yuan market at a glance: Instrument Current Difference from onshore Offshore spot yuan 6.2025 -0.19% * Offshore non-deliverable 6.23 -1.35% forwards ** *Premium for offshore spot over onshore **Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .

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