Chinese yuan might fall further, but keep slower pace: analyst
The Chinese yuan is expected to continue to fall further in the second half of this year after the latest steep decline, but the pace of the currency’s depreciation will become slower, an analyst said Wednesday.
Penny Chen, a fund manager at Manulife China Dim Sum High Yield Bond Fund, said that as the U.S. Federal Reserve is expected to kick off an interest rate hike cycle later this year, non-U.S. dollar currencies will depreciate against the greenback accordingly.
The latest move by the People’s Bank of China (PBOC) to cut the yuan’s reference rate sharply to allow the Chinese currency to fall significantly shows that the POBC seized the anticipated Fed rate hike as a reason to drag down the yuan, as China’s economic fundamentals need a weaker yuan to support growth, Chen said.
On Wednesday, the PBOC lowered the yuan’s reference rate by 1.62 percent after a 1.86 percent cut seen a day earlier. Following the PBOC’s hints, the yuan fell 1.82 percent at one point Wednesday, extending from an almost 2 percent drop seen the previous day.
Market analysts said China wanted to take advantage of the devalued yuan to boost its exports in a bid to help the country achieve the officially targeted 7 percent growth in the economy for 2015.
Following the cut in the yuan’s reference rate, the PBOC said in a statement that the reform of a yuan exchange rate formation mechanism will continue to be pushed forward in line with market orientation.
Chen said that while China is leading its currency to trend lower, it needs to control the pace of the depreciation at a time when the country is improving its financial market in a bid to enhance globalization. She said that China needs a more stable yuan and to prevent the currency from taking a big swing.
So, the analyst said, China could slow the yuan’s depreciation against the U.S. dollar to stabilize the domestic foreign exchange market in the second half of this year.
Echoing Chen, Liang Kuoyuan, president of Yuanta-Polaris Research Institute said that China needs to improve the transparency of its currency market to narrow the gap with its foreign counterparts by reducing its manipulation of the yuan.
If the PBOC continues to allow the yuan to fluctuate in a wide range, Liang said, China’s efforts to boost its financial market globalization could be compromised.
The steep decline of the yuan has set off another currency deprecation competition in the region. The Taiwan dollar, which is one of the regional currencies following the yuan in depreciation, fell 2.22 percent against the U.S. dollar in the past two sessions.