BEIJING: China’s yuan declined sharply Monday to its weakest level in seven months, pressed lower by the central bank (CB) as Beijing inserts to a host of measures aimed at spurring growth.
The People’s Bank of China set the morning reference rate–which typically sets the daily direction–weaker, with traders then pushing the yuan down to the closest it has ever been to the weak side of its 2% daily trading band. The band was widened in March last year.
China’s move comes as many other large economies seek to boost growth with weaker currencies. The European Central Bank last week announced larger-than-expected stimulus measures, which sent the euro tumbling to its lowest levels in over 11 years, while emerging-market giant India has also surprised markets with an interest-rate cut this month. The U.S. recovery continues to remain on track.
For China, a weaker currency should help two key elements of the world’s second-biggest economy: exports and inflation. Data last week showed China was growing at its slowest pace in almost 25 years, while inflation has fallen to a five-year low, sparking worries over building deflationary pressures and spluttering growth. A weaker currency makes it more expensive to import goods from rest of the world, which spurs inflation.
The country has recently made a range of stealth measures, including slashing interest rates for the first time in over two years in November and last week allowing banks additional room to lend–but has so far avoided announcing outright monetary easing policy measures.
Analysts say however that the moves to weaken the currency in the last few days has been the opposite of the central bank’s guidance in December, when the currency was fixed at a stronger level but traders still pushed the yuan weaker.
Foreign exchange purchases data for December 2014 released last week showed that the People’s Bank of China had sold $23.1 billion, the largest net amount sold since January 2000, according to analysts from ANZ, pointing to signs the central bank may be selling dollars and buying the yuan.
“The intervention in December indicates that the [People’s Bank of China] may be uncomfortable with the pace of yuan depreciation, and sought to cap the upward move” in the currency against the U.S. dollar, Khoon Goh, senior currency strategist at the ANZ, wrote in a note to clients Monday. A higher number for the yuan against the U.S. dollar means a weaker currency.
The yuan ended 2014 down 2.4% against the U.S. dollar, its largest annual loss and first drop since 2009. This year so far, it is down 0.9%.
Other investors and analysts say that the currency’s movements are part of the central bank’s plan to make the unit more market-driven.
