Traders have been pushing the currency lower, against central bank efforts to stabilize it
Investors see more pain ahead for the Chinese yuan, as pressure mounts for Beijing to address slowing growth by devaluing its tightly controlled currency.
Late in the New York day Tuesday, the yuan sank to 6.2765 against the dollar in the offshore market, where investors can trade the currency freely. That compares with 6.2663 yuan per dollar a day earlier, according to data provider CQG, and the official rate of 6.133. The official rate is set daily by China’s central bank.
The yuan’s losses reflect growing unease among investors about the economic prospects of the world’s second-biggest economy. China guided the yuan higher for years, helping draw in cash and supercharge growth. The fear today is that that same money is leaking out of the country now that the economy is expanding at a more moderate pace. A falling yuan would hasten that move by reducing the value of Chinese assets.
Many investors also believe China will need to nudge the yuan lower as a global race among central banks to reduce the value of their currencies intensifies.
Countries from Indonesia to Canada see a weaker exchange rate as key to spurring growth. China could face headwinds as major trading partners benefit from falling currencies.
However, some say they are wary about what could happen if the People’s Bank of China joins the currency wars. Investors for a decade counted on blistering Chinese growth to fuel rallies in assets as diverse as commodities and emerging-market stocks. Some of those gains have already been undone, as evidenced by sharp declines in prices for raw materials such as copper and iron ore, where China is the biggest buyer.
The yuan’s backsliding in recent months could herald more ripple effects to come, investors say.
“The economic backdrop, with a race to the bottom, tells me that the [Chinese yuan] is likely to experience weakness in the years ahead,” said Russell Thompson, chief investment officer at London-based hedge-fund the Cambridge Strategy, which manages $3.2 billion.
China is “caught in a debt trap” he said, adding that his company’s funds turned bearish on the yuan in the last quarter of 2014 as China’s economy slowed.
The yuan is down 0.8% this year in mainland trading, after falling 2.4% last year, its biggest annual drop since a revaluation in 2005.
The central bank sets a daily reference rate for the yuan’s value against the dollar, then allows it to trade within 2% of that fixing. Lately, traders have pushed the yuan to the weak end of its official range. In recent weeks, the offshore yuan has been pushed outside this limit.
There is more cash betting against the yuan than there has been for 10 months, according to recent survey data from Reuters on investors’ positions in the dollar against Asian currencies. Chinese banks sold a net $17.5 billion in foreign currencies in January, the central bank reported Tuesday. Analysts said this is a sign exporters and individuals preferred to hold foreign currency rather than yuan.
Many investors say the currency is still too strong given China’s declining growth rate, falling inflation—which is at a five-year low—and dismal economic data. Some say China’s central bank will be forced to give its currency more room to fall by widening the trading band.
Others worry about the ballooning debt pile in China, which has quadrupled since 2007, to $28 trillion as of mid-2014, according to a recent report from the McKinsey Global Institute.
Chris Morrison, head of strategy at hedge fund Omni Macro Fund, with $1 billion under management, said China needs to weaken the yuan to bring it in line with its slowing economy. But he said the fund has exited from its bet against the currency.
“The market has gone as far as the market can go without a policy move,” he said. The problem is, “the Chinese authorities don’t want to appear panicked or under pressure, as this will only encourage [Chinese yuan] outflows in the short run.”
Others believe the yuan won’t decline much further, given the central bank’s desire for a steady currency.
“China has a very significant slowdown into this year, but we don’t think it will play out through the currency,” said Claire Dissaux, head of economics and strategy at Millennium Global Investments, which has $14 billion under management.
Ms. Dissaux said it is expensive to bet against the Chinese currency, given market expectations for it to fall further over the next 12 months.
Still, worries about further losses in the yuan are widespread. The price of options contracts that grant investors the right to buy or sell the offshore yuan against the U.S. dollar at a specified future price rose to a multiyear high this week, pointing to rising bearish sentiment as investors’ demand for these options grows.
“[The yuan] is no longer the one-way bet that it was,” said Paresh Upadhyaya, director of currency strategy at Pioneer Investments in Boston, which manages $240 billion.
“The transition is going to be a painful one to foreign investors. We are just not used to seeing a slowdown in the economy.” Mr. Upadhyaya said his firm is mostly steering clear of bets on the yuan.
original source: http://www.wsj.com/articles/pressure-builds-to-weaken-the-yuan-1424215448