SHANGHAI/BEIJING: China's yuan slid dramatically against the dollar on Tuesday, heading for the largest single-day drop in its relative value since 2008, as corporates bailed out of the currency on expectations of further monetary easing.
Spot yuan slid nearly half a percent to 6.2007 per dollar in morning trade, accelerating a decline that began when China's central bank surprised markets last month by cutting interest rates, seen as bearish for the yuan.
The slide began intensifying on Monday, when the yuan lost 0.37 percent by market close. With the dollar index approaching 90, sentiment toward yuan has weakened further, traders said.
The sharpness of the decline has been enabled by liberalisation of the foreign exchange market earlier in the year, when the People's Bank of China (PBOC) allowed the spot price to rise or fall by 2 percent away from the daily fix, up from 1 percent previously.
On Tuesday, the yuan was trading 1.3 percent weaker than the mid-point.
Analysts have been bearish on the yuan since PBOC's surprise cut to guidance lending rates on Nov. 21, seen as negative in part because it would reduce the relative attractiveness of yuan-denominated assets by diminishing returns.
Reports that Beijing is now considering cutting reserve requirement ratios (RRR) at Chinese banks, seen as the next step for propping up rickety economic performance, have further accelerated the pace of withdrawal.
Reducing the amount cash that banks are required to hold as reserves would flood markets with cheap yuan.
The central bank has signalled it does not want the yuan to collapse, strengthening the official guidance rate by 0.25 percent since the rate cut, but the market has ignored the signal and corporates have been selling yuan en masse.
In the past, analysts say the strong influence of state owned banks and so-called "window guidance" from regulators has been sufficient to keep commercial traders from wandering too far from the main rate.
"What is conspicuous is that the PBOC is sitting idle, letting the yuan to weaken," said one trader at a major Chinese commercial bank in Shanghai.
"If this trend continues, the yuan has further room to depreciate."
Some economists have speculated that a weaker, less stable yuan might trigger capital flight, but others believe the volatility is a natural consequence of reform.
"I don't think it would trigger capital flight," said Zhu Haibin, China economist at J.P. Morgan in Hong Kong, pointing out that China's enduring trade surplus and its higher interest rates compared with dollar-denominated assets did not justify a wholesale withdrawal.
"Obviously the corporate sector would adjust their FX position like what happened in the first half of this year, but the bottom line is that we don't think the PBOC is changing the policy tone, so maintaining stable currency with two-side volatility."
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