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Will the Yuan Decline By 10%?

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Chinese yuan

Will the Yuan Decline By 10%?

Aug 13 2015, 07.28am GMT


The aftermath of the double devaluation of the yuan by China’s central bank, the People’s Bank of China, has aroused speculation that future devaluations could be in the offing, dropping the value of the yuan by as much as 10% against the U.S. dollar.

According to the Wall Street Journal, Beijing once again intervened in the forex market to stop a further drop in the yuan (USDCNY, +0.4056) against the dollar after it went down almost 2% on Wednesday.

Meanwhile, Nick Lawson from Deutsche Bank said on Wednesday in a note, “China has signaled a significant shift by reinforcing yesterday’s action with further slippage today. The authorities have been in to smooth the process this morning and have verbally questioned the extent of the weakness so far, but that is little more than lip service.”

Lawson added, “We estimate that the currency is overvalued by around 10% and given that the dollar has rallied 10-15% versus most [emerging market currencies], 10% would seem to be a reasonable target for now.”

Reuters reports that data released on Wednesday indicates that growth in industrial production is still sluggish in the second largest global economy. Fiscal expenditure in China has risen by 24.1%, an indication of government efforts to stimulate economic growth.

The report also notes that the PBOC is under pressure to devalue the yuan further in the coming months. Certain government officials seem to be in favor of a lower currency to stimulate growth in the lagging export numbers. Reuters quoting “sources involved in policy making” stated that there is pressure for the yuan to devalue by almost 10%, underscoring the view expressed by Deutsche Bank.

A Bloomberg report says that China’s move to allow market sentiment to have a greater influence on the yuan value is stirring up turmoil in currencies, commodities and stocks globally while reshaping the world economic outlook.

BMO Nesbitt Burns analyst, Jessica Fing said a weaker yuan meant weaker imports, particularly of copper and iron ore by China.

She said in a note, “From a commodity cycle perspective, these remain the two commodities where there has been an over allocation of capital (and thus now oversupply) given the prevalence of the ‘buy what China buys’ through the mid-2000s. Ultimately however, all industrial metals are at risk, including our ‘preferred’ commodities, palladium, nickel and zinc.”

Gold seems to have escaped the drop in prices on the back of possible speculative purchases by Chinese investors who see an opportunity for an increase in the yuan price of the precious metal in the wake of the devaluation.

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