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 Perceived mis-steps by China's authorities have stoked concerns in
global markets that Beijing might lose its grip on economic policy,
even as the country looks set to post its slowest growth in 25
years.
A 1.5 percent depreciation in the yuan since the start of 2016,
following a 4.7 percent weakening in 2015, had raised alarm among
some trade rivals that China was risking a "currency war" of
competitive devaluations.
The yuan's rally could help temper those fears, but it failed to
stop investors selling Chinese shares.
The Shanghai Composite Index and the CSI300 index ended down more
than 5 percent after a 10 percent plunge last week that triggered a
global sell-off of riskier assets.
Tapas Strickland, an economist at National Australia Bank, said
"indecisiveness and lack of transparency" was exacerbating market
uncertainty.
"Understandably, amidst this global markets are selling Chinese
policymakers' ability to control their economy."
The People's Bank of China set the mid-point for the yuan at 6.5626
per dollar, firmer than Friday's fix and substantially stronger than
the spot yuan's previous unofficial close of 6.5938. The yuan is
allowed to stray no more than 2 percent either side of the
mid-point.
The PBOC had also set a stronger daily guidance rate for the yuan on
Friday, following a sequence of eight weaker fixes that culminated
in the biggest one-day drop in five months last Thursday.
"Different signals about FX policy have wrong-footed market
participants, and we are wary in believing that an immediate
calmness will soon emerge," wrote Paul Mackel, head of emerging
markets FX research at HSBC, in a note.
"In this context, we expect yuan volatility to remain high, while
depreciation pressures are likely to remain strong."
OFFSHORE INTERVENTION
The spot yuan strengthened to 6.5756, while the offshore yuan gained
around 1 percent to 6.6200, narrowing the spread between the two to
under 0.7 percent. The spread, which stretched to more than 2
percent last week, was complicating Beijing's struggle to stop
capital flowing out of the slowing Chinese economy.
The narrowing spread appeared in part to be down to offshore buying
by China's central bank, traders and analysts said, which was
draining the supply of offshore yuan and in turn pushing offshore
yuan interbank borrowing rates in Hong Kong (HIBOR) to record highs.
A former head of international payments at China's foreign exchange
regulator urged investors not to be alarmed by foreign institutions
"talking down" the yuan, saying the currency remained stable against
most currencies, even though it was down against the dollar, the
official Economic Daily reported on Monday.
Beijing launched the RMB index last month, which weights the yuan's
exchange rate against a basket of trade-related currencies, a move
that will eventually loosen the currency's link to the greenback.
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Zhou Hao, senior emerging markets economist for Asia at Commerzbank
AG, said the last two days' fixes did suggest that the central bank
wanted to hold back the pace of yuan depreciation as the RMB index
dropped to below 100.
"We still need some time to check the credibility of China’s new
currency basket," he added.
"The Chinese authorities clearly want to signal that it will not be
a one-way trade in the renminbi," said London-based Rabobank
currency strategist Jane Foley.
"But most people would recognize that were you to take away the
interventions it is a currency that would fall."
Indeed, Goldman Sachs revised its yuan forecasts for the coming year
sharply lower to 7.00, and to 7.30 for 2017.
Chinese markets have had a tortuous start to the year, buffeted by
the falling yuan, two days of stock exchange suspensions last week,
and weak factory and service sector activity surveys.
All of which raised anxieties ahead of China trade data on
Wednesday, which are expected to show further declines in exports
and imports, underlining the parlous state of world trade flows.
Figures out over the weekend showed Chinese consumer inflation stuck
at a subdued 1.6 percent in December, while producer prices were
down a steep 5.9 percent on the year - a deflationary pulse that is
being felt across the globe.
In a research note dated Jan. 8, Moody's Investors Service put the
market turmoil down to an inherent tension between Beijing's
attempts to reform its economy and give a greater role to market
forces while maintaining economic and social stability.
"Further financial market volatility is likely," it said.
(Reporting by Pete Sweeney and Lu Jianxin; Additional reporting by
Masayaki Kitano; Writing by Wayne Cole and Will Waterman; Editing by
Simon Cameron-Moore)
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