CHINA could let its tight grip on the yuan go without triggering a sustained market disruption, according to the majority of respondents in a Bloomberg survey of analysts and traders, though they see only a limited chance of such a move.
A Bloomberg poll of 24 domestic and foreign financial institutions suggests they have faith in the People’s Bank of China’s (PBOC) ability to control the exchange rate, despite mounting pressure on the yuan that has pushed it to the weak edge of its fixed trading band against the US dollar. Their average year-end forecast for the currency was little changed from current levels.
Respondents see the PBOC maintaining its focus on yuan stability and preventing a sharp decline, even if the Federal Reserve pushes back a widely expected interest rate cut, giving more fuel to the resilient US dollar.
Chinese authorities have been faced with managing a gradual decline in the yuan this year as a resurgent greenback weighs on currencies across the region from Japan to Indonesia. The PBOC is wary of triggering a vicious cycle of capital outflows and further yuan losses and as such favours stability over rapid declines.
Beijing has been setting stronger-than-expected daily reference rates for the managed currency as delayed US rate cut bets and the prospect of more monetary easing in China favoured the US dollar. At times, even state-run banks have sold US currency to stem the pressure on the yuan, which has weakened more than 2 per cent this year to its lowest since November.
But two-thirds of respondents think the market could cope with the removal of yuan support, finding a way to balance by itself after an initial sharp depreciation. The remainder see a panic sell-off which would lead to the quick restoration of the previous support measures.
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“Weighing up the pros and cons, the gradual approach of guiding yuan depreciation should be preferable,” wrote Ken Cheung, strategist at Mizuho Bank in a recent note. “However, we reckon that the PBOC is handling the situation better in terms of unleashing RMB depreciation as well as policy communication, reducing the likelihood of a market turmoil driven by FX depreciation.”
In April, there was some speculation that China could devalue the yuan in a big-bang move. Supporters said it would allow Beijing to boost exports and give room for rate cuts, while doubters argued it would only lead to a cycle of outflows and further declines.
Half of the survey participants think the PBOC will end its daily fixing support for the yuan only when the US dollar weakens significantly and the interest-rate spread between China and the US narrows. Over 70 per cent see China remaining focused on its own agenda and continuing to stabilise the yuan.
The re-election of Donald Trump as US president and Fed policy pose the biggest risks to the yuan, according to the survey. Still, even in the worst-case scenario of high tariffs being imposed on China, only three participants expect authorities to respond with a yuan depreciation.
The Republican candidate has threatened slapping 60 per cent tariffs on imports from China and 10 per cent duties on those from the rest of the world.
“Yuan depreciation should continue in coming months amid US dollar strength, weak Chinese activity and worsening external pressures,” Barclays strategists including Mitul Kotecha wrote in a note Monday. They see downside risks to forecasts that currently have the Chinese currency weakening to 7.30 per US dollar.
For Bloomberg’s survey respondents, the average year-end forecast for the yuan was 7.26 per US dollar. It traded around the 7.27 per US dollar level on Monday. BLOOMBERG
