Yuan posts its biggest decline in 20 years

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Hong Kong - China’s yuan recorded the biggest quarterly decline in two decades on concern that growth in the second-largest economy is losing momentum and after the central bank widened the currency’s trading band.

The People’s Bank of China doubled the yuan’s permitted divergence from a daily reference rate to 2 percent on March 17. The central bank has since cut the fixing by 0.28 percent, setting it at a six-month low of 6.1521 per dollar yesterday.

“The yuan is under pressure on capital outflows as expectations for yuan appreciation have greatly reduced,” said Meng Xiangjuan, an analyst at Shenyin Wanguo Securities. “Investors have become more pessimistic on China’s economic outlook. The yuan is likely to stay weak in the first half.”

The currency slid 2.6 percent in the first quarter, the biggest decline since the first quarter of 1994, after the government unified the official and market exchange rates at the start of that year. The yuan fell 0.09 percent yesterday to close at 6.218 a dollar.

China posted an unexpected slump in exports in February and a slowdown in factory output and retail sales in the first two months of this year. A preliminary purchasing managers’ index by HSBC and Markit Economics showed manufacturing was headed for a third month of contraction. The Shanghai Composite index of stocks completed the biggest quarterly loss since the three months to June last year.

The period of steady, predictable gains was over and the yuan’s outlook would depend on factors including foreign-exchange liberalisation, economic fundamentals and China’s push to promote its global usage, Dariusz Kowalczyk, a Credit Agricole CIB strategist, said yesterday. Yuan gains would continue in a slower, more volatile manner, he said. – Bloomberg


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