Yuan drops as China likely to rein in support

The yuan weakened in offshore trading amid speculation China’s central bank will rein in intervention now that the International Monetary Fund (IMF) vote on reserve-currency status is out of the way.

The People’s Bank of China (PBoC) will have a more hands-off approach and develop enough confidence to give market forces greater say, Paul Mackel, head of emerging markets foreign-exchange research at HSBC Holdings Plc in Hong Kong, wrote in a note yesterday.

The long-term goal is for very few interventions, PBoC deputy governor Yi Gang said at a briefing, adding that bigger two-way fluctuations are normal.

“The PBoC should be reducing its currency intervention and the yuan is likely to decline on weak economic fundamentals in China,” said Nathan Chow, a Hong Kongbased economist at DBS Group Holdings Ltd. “That said, China will have to strike a balance between letting the market play a bigger role and not allowing any major depreciation.”

The IMF’s executive board on Monday decided the yuan meets the standard of being “freely usable” and will join the dollar, euro, pound and yen in the Special Drawing Rights.

Losses reversed

The addition will take effect on October 1, 2016, with the yuan having a 10.92 per cent weighting, the IMF said. The offshore yuan reversed losses on Monday on speculation China intervened to support its exchange rate.

The Chinese currency traded in Hong Kong fell 0.19 per cent to 6.4448 a dollar as of 4:43pm local time. The yuan in Shanghai was little changed and closed at 6.3986, China Foreign Exchange Trade System prices show.

The central bank was suspected of intervening to bring the two rates closer together over the past few months, with the IMF saying in August that a wide gap means the overseas exchange rate can’t be used as a perfect hedge for onshore exposure.

The yuan’s 12-month nondeliverable forwards fell 0.4 per cent to 6.6464, data compiled by Bloomberg show.