Chinese Yuan suffers biggest weekly loss on record

China’s yuan suffered its biggest weekly loss on record today, as the central bank stepped up its intervention to weaken the currency ahead of a key government meeting next week which may be used as a platform to unveil more market reforms.

Directed at squeezing out speculators betting on continued yuan gains, the central bank has set about actively weakening its currency since mid-last week by using a mix of weak daily fixings and asking its agent banks to buy dollars.

The sudden slide in the yuan has added to global investor nervousness about China’s slowing economy, high levels of local government debt and an increasingly risky shadow banking system.

The intervention reached a frenzied pitch today, with the onshore yuan falling by its daily one per cent limit against a midpoint fixing for the first time since July 2012.

Some analysts expect more weakness in the coming days.

Today, the yuan briefly weakened to 6.1808 per dollar in intraday trade, more than 0.8 per cent below the previous close despite the central bank fixing the yuan slightly stronger at 6.1214 per dollar.

The Chinese currency closed at 6.1450 per dollar, down 0.27 per cent from the previous day’s close at 6.1284. It racked up its biggest-ever weekly loss of around 0.9 per cent and largest monthly loss of 1.4 per cent.

“I think there is a good chance for spot yuan to break the 6.20 psychologically important level, and it can happen as early as next week,” said Kenix Lai, a senior market analyst at Bank of East Asia.

“Only fast depreciation of the yuan can stamp out speculative money betting on yuan appreciation.”

Stepped-up efforts by the People's Bank of China to actively weaken the currency has led the yuan to a dramatic weakening cycle that many analysts believe may be a prelude to more foreign exchange market reforms including widening a daily trading band at an annual parliamentary meeting next week.

While the yuan has been allowed to move in a 1 per cent trading band against the US dollar on either side of the central bank’s daily reference rate since April 2012, it has mostly hugged the stronger end of the band.

As a relatively low-risk, high-yield currency that has gained more than 35 per cent against the dollar since it was revalued in 2005, the Chinese yuan has become a growing favourite among international investors.

The yuan has firmed every year against the dollar since 2010 with recent gains coming amid very little volatility and despite widespread weakness among emerging market currencies, fuelling growth of speculative capital flows.

Reuters