Down but not out: fears ease over China's weaker yuan

A year ago on Thursday Chinese authorities stunned global markets by devaluing their yuan currency, raising fears the world's second-largest economy was worse off than thought -- but investors are now more sanguine about a weaker "redback".

The normally stable unit was guided down by nearly five percent over a week last August, and has declined steadily since then.

It closed at 6.6619 to the US dollar on Tuesday, not far from its weakest level for almost six years and approaching the rate where authorities held it rock steady between 2008 and 2010, in a bid to escape the turmoil of the global financial crisis.

But unlike the deliberate government policy of the past, financial markets see economic fundamentals as driving the recent decline in the yuan, also known as the renminbi (RMB).

A rise in US interest rates, Britain's vote to exit the European Union and the failed coup in Turkey have all sparked flight to the dollar.

Even so traders and China's business partners still want Beijing to pursue deeper reforms and greater transparency of its currency regime.
"A year on, investors appear slightly more relaxed about movements in the renminbi but we suspect that they remain as wary as ever about trusting Chinese policymakers to keep their word," Capital Economics said in a research report.

Beijing keeps a tight grip on its currency as part of Communist authorities’ control mechanisms, as well as worries sudden inflows or outflows of capital could damage the economy.

The government only allows the yuan to rise or fall two percent on either side of a daily fix on the national foreign exchange market.

Chinese officials have pledged to keep the unit stable, but at the same time gradually move towards making it freely convertible as they seek to secure a greater role in the world financial system. 

After years of lobbying, the International Monetary Fund (IMF) late last year finally agreed to include the yuan in its "special drawing rights" reserve currency basket.

"Concerns over the renminbi have eased in recent months and outflows have returned to a more manageable level," Capital Economics said.
Billions of dollars have flooded out of China in the last year, although the torrent has slowed dramatically, with Chinese banks selling $49.0 billion more in foreign exchange than they received in the April-June period, sharply down on the $124.8 billion of the previous three months.

China's foreign exchange reserves fell to $3.2 trillion in July, according to the latest figures, but remain by far the world's largest.

- 'Competitive devaluations' -

The yuan is expected to go lower this year, given the continuing impact of Brexit.

"Global uncertainties are gradually taking a toll," Citic Bank International chief economist Liao Qun told AFP. "And how much longer yuan is going to fall depends on when the euro and pound will bounce back again."

For years Washington criticised China over what officials have said is a grossly undervalued currency, but it has remained relaxed over the yuan's current weakness.
China has committed to moving in an orderly way to a more market-oriented exchange rate," a senior US Treasury official said on the sidelines of a G20 meeting in July. 

"The test will come when there is upward pressure on the RMB and whether China will allow the RMB to appreciate," he told journalists.

Chinese growth is slowing, with gross domestic product expanding 6.7 percent in the second quarter of this year, the same as the previous three months but down from 6.9 percent in 2015.

A weaker currency can help boost exports, and the central rate was fixed at 6.6594 on Tuesday, down almost nine percent on a year previously. 

"China's economy is facing a downturn. An undervalued RMB will support China's export performance in the short term," Qin Huanmei, an associate professor at Shanghai Finance University, told AFP.

China and other G20 nations last month reaffirmed a pledge to refrain from "competitive devaluations", repeating a commitment from February when worries over China's weakening currency and slowing economy were rampant.

The People's Bank of China, the central bank, on Friday defended its exchange rate regime, saying it was now weighing the yuan against a basket of currencies rather than just the US dollar to allow market forces to play a greater role.

But some analysts believe authorities are still meddling.

ANZ Banking Group said in a report: "The authorities do exercise discretion at times in setting the fixing to guide the market."

Source: AFP