New | PBOC reassurances see yuan stabilise after three-day rout
After declining for three consecutive days following Beijing's shock devaluation, the yuan strengthened on Friday following soothing words from China's central bank that suggested the authorities are not planning any further devaluation.
A day after People's Bank of China deputy governor Yi Gang said the authorities would act "when the market's volatility is excessive", the central bank raised the yuan's reference rate for the first time since Tuesday's devaluation.
Onshore yuan (CNY) gained 0.11 per cent, or 70 basis points, to finish the week at 6.3912 against the US dollar, while offshore yuan strengthened 0.4 per cent, or 260 basis points, to 6.4378.
Beijing this week introduced a new market-driven currency mechanism in which the daily reference point - the midpoint of the yuan's exchange rate with the dollar from which it can rise or fall 2 per cent - is based on the previous day's close, That has led onshore yuan to lose 2.9 per cent, or 1,815 basis points, over the past week. Offshore yuan has lost 3.6 per cent, or 2,248 basis points.
Some regional currencies also fell this week, triggering concerns about a fresh currency war in Asia. Since Tuesday, both the Singapore dollar and the South Korean won have lost 1.5 per cent, the Taiwan dollar is down 1.6 per cent while the Australian dollar has lost 0.4 per cent.
Some fund managers and analysts believe although there could be downward pressure on the exchange rate this year, a sharp depreciation is unlikely.
"While a big [10 per cent] CNY devaluation is not justified, the central bank is now putting greater emphasis on the CNY's trade-weighted value, and a combination of factors argue for a drop of 'around 3 per cent'. This adjustment may be close to complete, by our estimates," said Eddie Cheung, an analyst at Standard Chartered.
"Why would the PBOC allow the currency to depreciate further to risk triggering capital outflows? We expect [the yuan] to reach its new equilibrium at around 6.40 to 6.50 to the dollar," BlackRock fund manager Tan Suanjin said.
Despite the general outlook that the worst is over and there is limited downside for the currency, yuan-denominated products are under pressure to raise returns in order to retain customers. Dim sum bonds have seen yields surge as investors demand higher compensation in the wake of the yuan's sharp depreciation.
Offshore commercial banks are kicking off another cycle of raising yuan deposit rates to retain liquidity, underscoring outflow pressure from Hong Kong's yuan deposit pool.
Chan Ka-keung, Hong Kong's secretary for financial services and the treasury, said on Friday the scenario of some capital outflow from the city as a result of the devaluation should not be discounted and that Hong Kong was ready to handle such a situation.
"Although CNH (offshore yuan) will likely stay volatile for a while, CNH deposits still generate a good carry yield of around 3 per cent," Credit Suisse analyst Heng Koonhow said. "So I would expect CNH deposits to gradually grow over the longer run … only when there is good liquidity and a deep offshore pool of investable CNH assets, can the convergence in CNH and CNY be done more efficiently."
