China’s yuan hits one-year low; investors see more downside

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SHANGHAI — China’s yuan fell to a

one-year low against the dollar on Monday, extending losses

after posting its worst week since 2015, as a worsening economic

growth outlook drove investor concern that the currency had more

room to fall.

Sentiment also took a knock on fears that strict lockdown

measures will spread to Beijing, after the capital city

required everyone living or working in Chaoyang district to take

three COVID-19 tests this week and put more than a dozen

buildings under lockdown.

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Lockdowns in more than a dozen cities across the country,

including the financial hub of Shanghai, have heightened worries

over wider disruption to economic activity and raised some

doubts whether China will be able to reach this year’s growth

target of about 5.5%.

“Last Friday’s sharp CNY depreciation may mark an inflection

point for further CNY depreciation, (should) market continue to

focus on the negative yield spreads of China and near-term weak

economic performance,” said Li Lin, head of global markets

research Asia at MUFG Bank, revising down her yuan forecast to

6.55 by the end of the second quarter from 6.45 previously.

The People’s Bank of China (PBOC) set the midpoint rate

on Monday at 6.4909 per dollar prior to market open,

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the weakest level since August 2021 and not far from Reuters’

estimate of 6.4873.

In the spot market, both onshore and offshore yuan

, breached the key 6.55 per dollar, touching

their weakest levels since April 2021, before trading at 6.5412

and 6.5715, respectively, as of midday.

Several traders said the pace of yuan weakening slowed after

some state-owned Chinese banks, which usually trade on behalf of

the central bank in the foreign exchange market, offered small

amounts of dollars in the onshore market at around 6.55 per

dollar level.

Authorities, though, have yet to show discomfort about the

rapid losses in the yuan, which has weakened by around 2.6%

since last Monday.

Guan Tao, global chief economist at BOC International and a

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former senior official at China’s foreign exchange regulator,

said the current round of yuan depreciation was driven by the

offshore market rather than by guidance from the official

midpoint setting.

“The recent yuan decline was not the cause but the result of

foreign investors’ reduction in yuan assets … Once the market

confidence is restored, foreign capital may return at any time,

and the yuan will regain support,” he said.

Meanwhile, some traders said they are seeing growing demand

for dollars from their corporate clients, who are betting on

further declines in the Chinese currency.

The dollar’s strength – against the backdrop of aggressive

U.S. Federal Reserve tightening, the vanishing Chinese yield

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advantage and growing economic pressures – also has weighed on

the yuan.

“Looking ahead, the next target would be the March 2021 high

near 6.5795,” Win Thin, global head of currency strategy at

Brown Brothers Harriman, said in a note.

“With monetary policy divergence with the Fed set to widen,

we think this yuan move still has legs,” he added, noting the

yield spread between the world’s two largest economies would

continue to move in the dollar’s favor.

The yuan market at 0407 GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 6.4909 6.4596 -0.48%

Spot yuan 6.5412 6.5016 -0.61%

Divergence from 0.77%

midpoint*

Spot change YTD -2.85%

Spot change since 2005 26.53%

revaluation

Key indexes:

Item Current Previous Change

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Thomson 102.86 103.6 -0.7

Reuters/HKEX

CNH index

Dollar index 101.233 101.22 0.0

*Divergence of the dollar/yuan exchange rate. Negative number

indicates that spot yuan is trading stronger than the midpoint.

The People’s Bank of China (PBOC) allows the exchange rate to

rise or fall 2 percent from official midpoint rate it sets each

morning.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan 6.5715 -0.46%

*

Offshore 6.6567 -2.49%

non-deliverable

forwards

**

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC’s official midpoint,

since non-deliverable forwards are settled against the midpoint.

.

(Reporting by Winni Zhou and Andrew Galbraith; Editing by

Muralikumar Anantharaman)