China's yuan falls to near one-year low as economy worries mount

HONG KONG: China's yuan fell beyond 6.20 to the dollar on Wednesday for the first time since April last year amid market speculation the central bank will keep the currency weak as economic growth slows down.

The yuan has tumbled 0.8 percent this week after the People's Bank of China (PBOC) doubled the daily trading band for the currency to 2 percent from the mid-point set each day by the central bank.

Spot yuan briefly fell to 6.2009 per dollar by midday, down 0.14 percent from Tuesday's close of 6.1920 and more than 1 percent weaker than the mid-point set earlier of 6.1351.

"The yuan may not appreciate this year given China's weak economy," said a trader in Shanghai. "The return of yuan strength will not only rely on when the economy bottoms out, but when fresh long yuan funds come in."

Data this year, including a surprise 18 percent drop in exports in February and soft manufacturing reports, have raised concerns that China may struggle to meet its growth target this year of around 7.5 percent.

Rising debt worries following the country's first domestic bond default and the looming bankruptcy of a Chinese developer, have added to market jitters.

Some traders suggested the decline in the currency may reflect the central bank's desire to offer a sluggish economy some help by effectively easing monetary conditions.

However, not all traders subscribed to that view. Others said the decline reflected genuine trade to reduce long positions in the currency.

They pointed to the fact that just two days into the 2 percent band regime, the market had already moved the currency by the equivalent of the previous band's 1 percent limit.

When the band was last widened in 2012 - to 1 percent from 0.5 percent - it took the market two weeks to build up the courage to test even the previous band's width given how closely the central bank controls the market.

The yuan's decline reverberated offshore, where the currency's non-deliverable forwards (NDFs) indicated further weakness to come.

One-year NDFs priced the yuan 1.5 percent below the midpoint fixing, compared with half a percent in December.

Deliverable yuan in Hong Kong fell to its lowest level since April 2013, with traders predicting further weakness because structured product positions could come under pressure.

Offshore yuan fell to 6.1953 per dollar in morning trades, stretching a streak that has seen it weaken by 2.6 percent in nearly a month, wiping out its 2013 gains.

"Investors are deleveraging the yuan appreciation expectation in the short-term following the band widening," said a dealer in Hong Kong.

The fall in the offshore yuan spot rate beyond 6.19 per dollar, the lowest level in more than eleven months, is pressuring lots of structured yuan products which were originally sold around that level, pointing to the risk of a blowout on the short-end volatility curve looms.

Analysts say they expect further market reforms following the widening of yuan band. The next meaningful reform would be for Beijing to shift to a new market-based regime and away from setting the daily yuan fixing.

As an intermediate step, China could peg the yuan to a basket of currencies weighted by the importance of its trading partners. Lu Ting, an analyst at Bank of America Merrill Lynch said that more specifically, Singapore's so-called BBC regime, or basket, band and crawl, seems to be favored.