HONG KONG: China's yuan weakened on Thursday after the central bank cut banks' reserve requirement ratio for the first time in over two years to combat an economic slowdown and looming deflation. The cut also highlights a pick-up in capital outflows in recent months, which have removed a key support for the currency. The latest data showed a $91 billion deficit under the capital account in the fourth quarter.
As capital outflows have gained momentum, the yuan has been pushed towards the weaker limit of its trading band. Large state-owned banks have had to step into the currency market to sell dollars to ensure the yuan's weakness doesn't trigger even larger outflows. On Thursday, the People's Bank of China set the midpoint rate at 6.1366 per dollar prior to the market open, weaker than the previous fix of 6.1318.
Spot yuan opened at 6.2560 per dollar and was at 6.2536 at midday, 59 pips away from the previous close and a few pips away from the trading limit.
The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day.
Analysts at ANZ believe the 50 basis points cut in the RRR is expected to inject about 600 billion yuan ($95.96 billion) into the banking system, which would help replenish the yuan liquidity which the central bank has soaked up in the course of FX intervention.
"We maintain our view that the authorities will not depreciate the currency, as that would risk even more capital outflows, which could prove to be destabilising," ANZ strategists wrote in a daily note.
In keeping with the onshore market trend, the offshore yuan was trading -0.07 percent away from the onshore spot at 6.2582 per dollar.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.384, -3.88 percent away from the midpoint.
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