The yuan’s decline is set to gain momentum over the next few months as markets factor in a deteriorating economy hit by Chinese authorities’ fight against another Covid outbreak.
Analysts at Credit Agricole, Standard Chartered Bank, BNP Paribas and HSBC Bank lowered their forecasts as the yuan fell more than 3% this month. A Bloomberg poll of 11 traders and analysts suggests the yuan will fall to 6.7 per dollar in three months, about 2% below its current level.
The turnaround comes just months after China sought to tame the yuan’s power as Covid restrictions sparked fears the country would miss its economic target as even the capital Beijing battles a pandemic outbreak. As the central bank and politicians pledge more support, Chinese markets fall, raising the risk of accelerated capital outflows.
“I don’t think this is the end of the recent depreciation of the yuan,” said Bo Zhuang, senior government bond analyst at Loomis Sayles Investments Asia in Singapore, who expressed concern about a potential hard landing if Beijing imposes a lockdown. He sees the yuan weakening to 6.85 per dollar this year with the potential to fall to 7.00 next year.
Morgan Stanley and other banks cut their growth forecasts in China below the official forecast of 5.5% for the current year.
The onshore yuan fell nearly 1% this week to $6.5571 per dollar on Wednesday, while the offshore yuan fell 1% to $6.5891 over the same period.
HSBC and BNP Paribas now forecast the yuan to fall to 6.60 per dollar by the end of June, while Standard Chartered and Credit Agricole forecast 6.70. Bank of America Corp. and TD Securities forecast the currency to fall to 6.80 by the end of the year on deteriorating trading conditions. In late March, analysts polled by Bloomberg expected the currency to trade around 6.38 by the end of the second quarter.
“The outlook for the yuan is highly dependent on the development of Covid and the situation of China’s economic growth potential,” said Alvin Tan, head of Asia FX strategy at the Royal Bank of Canada in Hong Kong. “It makes sense to use controlled currency devaluation as a safety valve.”
The PBOC’s measured approach to supporting the yuan is also reflected in its reluctance to use the daily interest rate as a signaling tool. The conclusions drawn at the last meetings largely corresponded to the assessments of the experts. On Monday, the central bank cut the amount of foreign currency banks are required to hold in reserves. This decision should increase the liquidity of the yuan.
“I prefer to view the NBK’s actions as managing exchange rate volatility rather than controlling exchange rate levels or attempting to reverse trend,” said Philip Vee, senior currency strategist at DBS Bank Ltd in Singapore.
The NBK has various tools to boost the yuan. It could leverage currency fixing, lower the cost of selling offshore yuan and further reduce foreign exchange reserve needs, according to Bloomberg poll respondents. The central bank could also limit foreign exchange outflows and domestic purchases, traders and analysts said incognito, as they are not authorized to comment publicly to the press.