Yuan depreciation will be 'slower and milder'
Updated: 2016-09-09 07:02
By Lin Wenjie in Hong Kong(HK Edition)
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The onshore yuan declined 0.6 percent in August, while the currency traded in Hong Kong fell 0.9 percent in the same month, with depreciation bets mounting as the US Federal Reserve prepares to increase interest rates and the Chinese mainland's economy shows signs of cooling.
The retreat has strengthened market expectations that further depreciation of the mainland currency is on the horizon. Economists believe that once the mainland cuts interest rates to boost the economy - or, as is widely expected, the US raises rates later this year - the yuan will depreciate further, but in a milder way.
JP Morgan said in a research note released on Aug 12 that the worst time for the yuan had passed, and the pace of its depreciation will be slower in the second half of 2016, with year-end onshore yuan (CNY) to the greenback forecast at 6.85.
"China's gross domestic product picked up in the second quarter and the current account surplus remains decent. With the fundamentals having stabilized, the risk of a significant near-term CNY depreciation remains low - while gradual, moderate depreciation appears to be the most likely scenario in the second half," the report said.
CNH seen moving in same direction
JP Morgan noted that the offshore yuan (CNH) will move in a similar direction to CNY. "Although the gap between the CNH and CNY spot exchange rate has narrowed, it will not disappear in the short term until the capital account convertibility is fully realized," added JP Morgan emerging Asia foreign exchange and rates strategist Gu Ying, who is one of the co-authors of the report.
Citibank expects the yuan to depreciate to 6.71 by year-end, due to potential monetary easing measures to be taken by China's central bank to buoy slowing growth in the economy.
"China's central bank is likely to cut the reserve requirement ratio by three times for the rest of the year, each by 50 basis points, and there's the possibility that the central bank will cut interest rates," said Catherine Cheung, head of investment strategy and portfolio advisory at Citibank Global Consumer Banking. "But, a sudden depreciation like what happened in August last year is unlikely."
China's economic growth held steady at 6.7 percent in the second quarter of 2016, as a buoyant property market and government stimulus boosted demand for factory output. However, the downward pressure on the economy remains significant as fixed-asset investment only grew at the slowest pace since 2000 in the first six months.
It has been one year since the central bank reformed the CNY exchange rate regime. It devalued the yuan's fixing rate by 1.9 percent on Aug 11 last year to fix the discrepancy between the reference rate and actual spot rate in the market. Since then, the yuan has depreciated against the US dollar by 6.9 percent.
Following the depreciation trend, Hong Kong saw a liquidity crunch in its offshore yuan pool, and a decline in the issuance of dim sum bonds.
Loan demand for yuan strong
"The shrinkage of the yuan pool is directly related to the depreciation of the yuan," said Arthur Yuen Kwok-hang, deputy chief executive of Hong Kong Monitory Authority, on Jan 29, 2016.
He attributed the shrinking yuan liquidity pool to "market demand and supply for CNH funds", but emphasized that the contraction of the yuan pool had little impact on yuan transactions as the loan demand for yuan remained strong in Hong Kong.
DBS economist Nathan Chow Hung-lai acknowledged that the continuous depreciation of the yuan had an impact on its internationalization in the short term. But, from a long-term perspective, the yuan is likely to be increasingly used as a funding currency through the Belt and Road Initiative.
"As you can see, yuan depreciation had already affected the offshore yuan pool in Hong Kong, dragging on the internationalization of the renminbi," Chow told China Daily. "However, the shrinkage of the yuan pool can be seen as a normal adjustment, because appetite for yuan assets had been very high in the past five years as yields were much higher than in other markets, considering the one-way appreciation of the yuan."
This month marks five years since China launched the renminbi in its unstoppable global ascent with the opening of the offshore RMB market in Hong Kong.
According to statistics released by the Hong Kong Monetary Association, the offshore yuan pool grew continuously until the end of 2014, when the yuan stayed strong. After that, the pool had shrunk 147.9 billion yuan by 2015, declining for the first time by 12.7 percent as the yuan came under depreciation pressure.
(HK Edition 09/09/2016 page1)