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Investors brace for volatility as yuan tests waters
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THE Chinese yuan has been depreciating for nearly four months, losing more than 20 yuan (US$3.30) for every US$100.
The local currency touched 6.2591 to the US dollar on April 29, its weakest level since 2012.
The good news is that a weaker currency can be positive for the economy by making exports cheaper. The bad news is that a currency on the decline can also trigger outflows of money, risking financial instability.
“Either depreciation or appreciation could have multiple impacts on trade and enterprises,” said Shen Danyang, a spokesman for the Ministry of Commerce. “Some companies will suffer, while others will benefit. Exporters prefer depreciation; importers prefer appreciation. The picture becomes even more complex for those engaged in overseas investment or the use of foreign investment.”
Airliners have been among the victims because they usually carry heavy dollar-denominated debt for purchasing fuel and leasing aircraft.
China Business News reported that Chinese airliners lost 1.3 billion yuan in foreign-exchange operations in March, down from a gain of 400 million yuan the same month last year.
That is bad news for an industry already suffering from slower demand as tougher economic times pinch discretionary spending on travel.
China Southern Airlines has estimated a loss of between 300 million yuan and 350 million yuan in the first quarter due to fewer passengers and rising operating costs attributed to the yuan’s depreciation.
Air China said first-quarter net profit may drop 55 percent to 65 percent from the same period last year.
Steel and copper producers are also hurting. Import costs for raw materials are rising, and futures prices have dropped on massive sales. Commodities have lost their investor appeal as their values fell along with the currency. Companies that depend on bank loans to import copper and iron ore are required to pay higher guarantees.
Mixed picture
Even for exporters, the picture is mixed.
Smaller exporters of goods like clothing and footwear may feel some relief, but large exporters of machinery and other big-ticket merchandise may need to adjust their financial and procurement strategies to ensure that operations in cross-border trade and capital exchanges remain smooth, according to a Guotai Jun’an Securities report.
In any event, the benefits from yuan depreciation aren’t sustainable, and using a lower-valued currency to boost exports will land China back in its old over-reliance on labor-intensive, export-oriented industries, experts have said.
In financial markets, the cheaper yuan hasn’t produced any worrying effects yet.
Use of the yuan in international settlements, and onshore and offshore spot trading of the currency seem to be functioning normally.
Net purchases of foreign exchange by banks in China, excluding exchange-rate factors, reached US$159.2 billion in the first quarter, 57 percent ahead of the same period a year earlier, the State Administration of Foreign Exchange said in a statement in late April.
That indicated inflow of foreign currency continued, but the monthly surplus in March slipped to US$40.2 billion from US$73.3 billion in January due to yuan depreciation.
Guan Tao, the head of the international balance department at the forex administration, lauded the data as a sign of improvement in China’s cross-border capital flows.
Use of the yuan
Data from SWIFT, a global financial transaction information provider, said the yuan moved up one notch in March from February, becoming the world’s seventh largest payments currency. Payments rose 29 percent on the month to a record high. The yuan accounted for 1.62 percent of global payments, up from 1.42 percent in February.
The US dollar and the euro remained the world’s largest payment currencies. The dollar accounted for 40.19 percent of global payments, and the euro, 31.78 percent.
The opening of a clearing bank in Singapore has helped the city-state overtake London as the second-largest clearinghouse for the yuan outside of the mainland and Hong Kong, according to SWIFT.
HSBC data showed that both onshore and offshore trading in Hong Kong have been stable despite the depreciation.
Onshore spot turnover has remained close to its 12-month average, while the volume of offshore spot and forwards climbed to nearly US$30 billion a day in March, its highest level since offshore yuan markets were initiated.
“It reflects policymakers’ preference not to trigger a disorderly move in the currency and it will help enable them to roll out further foreign-exchange reform,” the HSBC report said. “Interest rate differentials, even in light of recent volatility, still work in the yuan’s favor. Once the People’s Bank of China is more comfortable with the nature of inflows, we think the yuan could resume appreciating in the second half, albeit in a more volatile manner.”
Still, HSBC said the extent and duration of this depreciation period have exceeded the expectations of many.
The People’s Bank of China doubled the yuan-dollar trading band in the middle March to 2 percent on each side of the central parity rate, allowing wider fluctuations in the currency.
HSBC has significantly cut its year-end forecast for the yuan to 6.14 to the US dollar, or an annual depreciation of nearly 1.5 percent, from 5.98, or a 1 percent appreciation.
Australia & New Zealand Bank also lowered its forecast to 6.15 yuan from 6.08. It said the depreciation trend may extend through the third quarter, after earlier forecasting an end in the current quarter.
Whichever way the yuan moves, consumers, investors and businesses alike should gird themselves for a more volatile currency ahead.
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