Published on Jul 24, 2018
On Monday, the State Council, China’s cabinet, also indicated plans to accelerate the issuance of 1.4 trillion yuan (US$207 billion) in special bonds by local governments to underwrite investment in infrastructure. The People’s Bank of China also lent 502 billion yuan to financial institutions via its one-year medium-term lending facility (MLF) to increase loans to companies.
The State Council comments and the MLF triggered expectations that policymakers would roll out more stimuli and further cut reserve requirement ratios in the coming weeks, shifting away from the past year’s deleveraging campaign to curb risky lending that had created tight cash conditions.
Onshore yuan was changing hands at 6.8073 to the US dollar on Tuesday, down 0.13 per cent from the previous day and hitting its weakest level since June 2017. It is mid-ranked among Asia’s 11 most traded currencies, the fifth worst performer so far this year.
The unexpected decision by China’s central bank to allow the yuan to break below the 6.7 per dollar level in the past week also signalled greater tolerance from the Chinese authorities for further downside, and that they were in no hurry to prop up the currency.
“Compared to the panic selling after the Chinese yuan fixing reform in 2015, capital outflows are taking a back seat and China is enjoying the advantages of a weaker currency,” said Ken Cheung, senior Asian currency strategist at Mizuho Bank.
While the strength in the US dollar was a main reason for the weaker yuan, an increasing factor now coming into play is expectations for the Chinese authorities to loosen monetary policy.
The trade-weighted RMB CFET index, against its major trading partners, dropped to 93.8 this week, after rising steadily this year through end June.
Policymakers were stress testing the economy and currency, allowing greater market forces to determine prices in line with their plans to implement reforms, analysts said.
DBS Bank forecast the yuan to fall to 6.97 per dollar by year end, which would be the lowest level since 2016 and a drop of nearly 12 per cent from its March peak. Other analysts said the key psychological resistance was now 7 per dollar.
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