Those seeking safe harbour in China's steadily rising currency were left reeling Friday after the yuan posted its steepest-yet decline, amid broad suspicion that the fall was engineered by the country's banking authorities.
In Shanghai trading, the yuan reached 6.1808 per U.S. dollar Friday, a fall of 0.86 per cent that marked a 10-month low. Though it subsequently retraced some of the day's losses, this week marked a record weekly tumble for the tightly-controlled currency, and closed a slide of 1.3 per cent over the past month.
"Another day, another brutal move in the yuan," wrote Michael Turner, fixed income and currency strategist with RBC Dominion Securities Inc.
The yuan's sudden weakness has shaken investors, who – from February, 2013, through to mid-January – had latched on to a seemingly unshakeable ascent. The yuan, also known as the renminbi, gained 3 per cent against the U.S. dollar and 10.5 per cent against the loonie in that period, and its continued strength has made it a magnet for speculative trading.
Now, the People's Bank of China, which directs the currency's value but allows trading within 1 per cent in each direction of a daily set point, is widely seen as pushing its fall, both as a response to the country's slowing economy and as a signal to markets.
"Big deal or storm in a teacup? I think it's a turning point," said Kit Juckes, global head of currency strategy at Société Générale SA. Chinese central bankers are sending a message, not wanting "endless RMB appreciation because the economy is slowing," he said, referring to the currency by its symbol.
That may be cause for some anxiety. An enormous expansion in debt in recent years has stoked a global nervousness about the precariousness of the Chinese economy.
Hao Hong, the managing director for research at the Shanghai-based Bank of Communications, said the falling yuan carries "significant" implications, both for China and the broader economy. "It could start a trade war" by hurting other exporting nations such as South Korea, he wrote this week. It could cause pain inside China, too, particularly among property developers leaning on U.S.-dollar-denominated debt, he said. Shares in property developers were down 7.2 per cent in the past month, although largely stemming from reports that Chinese banks are tightening lending standards.
Whatever the case, if China's aim was to "quell speculation in the market, we are confident they will be well-pleased with their efforts," wrote Patrick Bennett, a Hong Kong-based currency strategist with CIBC World Markets Inc.
The yuan decline comes ahead of the annual meeting of the National People's Congress, the Chinese legislative body, which kicks off in Beijing next Wednesday. Though the actual congress is seen as largely symbolic, the two-week session is an important date on the Chinese political calendar. It is expected to see the introduction of some more specific measures, after the country sketched, in broad strokes, a plan for reform in the fall.
Among them may be a loosening on the yuan, with widespread expectations that China is contemplating a loosening on its currency, to allow trading within a 2 per cent band, rather than 1 per cent. Such a move stands to attain a similar objective as the recent yuan decline, in making clear the Chinese desire to shove out currency speculators.
"We suspect this marks a new phase in China's currency policy, in which policymakers will embrace greater volatility to deter speculative flows," wrote Qinwei Wang, London-based China economist for Capital Economics.
That notion adds a sense of irony to the fall in the yuan, which has been conducted under the auspices of a central bank Mr. Wang believes is actually preparing a further retreat in its hands-on currency management. His read: China can only prevent further appreciation in the yuan by buying up vast additional quantities of foreign exchange.
"That seems unlikely," he wrote. "Senior officials have recently said that the costs of foreign exchange accumulation now outweigh the benefits. The trend in policymaking in general is towards less intervention in markets."