China’s yuan jumped in offshore trade yesterday on suspected intervention by Beijing just hours before an IMF decision that is expected to grant the currency reserve status, while Chinese stocks extended a sell-off in a nerve-wracking morning session.
The offshore yuan opened at 6.4515 per US dollar, its lowest level in three months and priced at a deep discount to the onshore rate — a situation the central bank has resisted in the recent past after an unexpected devaluation in August had prompted market speculation of more yuan weakness.
The People’s Bank of China (PBOC) set the midpoint rate at 6.3962 per US dollar prior to market open, and the onshore spot yuan stayed pegged to the midpoint at 6.3961.
Several minutes after opening trade, however, the offshore rate firmed sharply to around 6.42 per US dollar, leading some traders to suspect state-owned Chinese banks were buying up yuan on orders from the central bank.
The sharp early moves came just as the IMF was set to approve the inclusion of the yuan in its reserve currency basket when it met yesterday in what is seen as symbolic coming of age for the world’s second-biggest economy.
The anticipated approval would place the yuan on a par with the US dollar, Japanese yen, British pound and euro, although corporates have shown increasing reluctance to hold yuan assets given expectations of further easing in China and imminent interest rate hikes in the US.
That has led the offshore market — which is not bound by the central banks’ guidance rate — to consistently price in more devaluation going forward, leaving the PBOC grappling to manage market expectations in line with its desire to hold the exchange rate stable.
“The spread between offshore and onshore markets is still large even after the suspected intervention,” said an onshore yuan trader at a foreign bank in Shanghai, adding that strong US dollar appetite by corporates in the onshore market was also pushing down the exchange rate.
Stock markets opened relatively flat but then resumed sliding, after posting their worst drop since the summer crash on Friday afternoon.
The sell-off accelerated after the lunch break. The CSI300 index fell 2.4 percent to 3,471.83 points at 5:22 GMT, while the Shanghai Composite Index lost 2.6 percent to 3,345.47 points.
However, Wang Yu, analyst at Pacific Securities in Beijing, said the stock market is unlikely to suffer a repeat of the summer rout as the government is keen for stability in equities to pursue further financial reforms.
“I’m not very pessimistic,” Wang said.
“The market might go down further this week, but I don’t expect to see the kind of rout we saw in the summer. The government needs a stable market in order to resume some basic functions of the market and push for further financial reforms.”
China CSI300 stock index futures for this month fell 1.3 percent, to 3,442.6, 35.61 points below the current value of the underlying index.
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