The Chinese Yuan Continues To Weaken — Here's What To Make Of It (FXI, EWH)

Mamta Badkar

The Chinese yuan continued its decline against the dollar, hitting 6.1259 yuan for a dollar on Wednesday. 

The People's Bank of China (PBoC) fixed the yuan at 6.1192 per dollar, according to the China Foreign Exchange Trading System.

After rising 3% against the U.S. dollar in 2013, the onshore yuan (CNY) weakened against the greenback last week. The offshore yuan (CNH) has also  weakened.

This comes on the back of efforts by China's central bank, the People's Bank of China (PBoC), to curb yuan appreciation, forcing many investors out of bets that the currency will continue to rise.

Societe Generale's Wei Yao pointed out the yuan has the two key qualities of a carry trade 1. High interest rates onshore; 2. A trend of steady appreciation.

While the former may have been driven by the Federal Reserve's monetary policy, she points out that the appreciation is something the PBoC has a handle over.

She also doesn't think the yuan will depreciate too much further, especially if the offshore yuan (CNH) continues to hover below the CNY, as that would be a sign of outflows. In this case she thinks the central bank "will most likely choose to stabilize the yuan again."

Yao also points out that even as the yuan appreciated, China has continued to add Forex reserves even as it has publicly said that it has enough reserves. "These seemingly contradictory messages and signs, in our view, suggest that the PBoC never really wants too much yuan appreciation, especially if it is driven by short-term speculative capital inflows."

For actual reform, "the PBoC should move from daily to weekly (or even monthly) setting of the reference rate, while at the same time widening the currency band," Yao writes. For now the yuan can trade in a 1% band, but some expect that to be widened to 2% as Beijing moves to internationalize the renminbi.

UBS' Tao Wang has previously said that "the era of steady CNY appreciation may be drawing to a close," and that she thinks this "is likely government-guided and may signal a change in China's exchange rate policy."

Here's a one-week chart of the USDCNY from XE.com that shows the the USD rising against the CNY:

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SEE ALSO: The Difference Between The Offshore And Onshore Yuan