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Since the end of January, the yuan has fallen 3.4% against the US dollar, hitting a 16-month low. The renminbi also experienced a three-month decline two years ago, when the European debt crisis intensified prompting investors to withdraw from the risky market, but that decline was less than half of the current round of decline. In the freely floating offshore market, the decline of the renminbi is even greater.
The decline of the renminbi was initially led by the People's Bank of China, which hopes to thwart short-term speculators who bet on the renminbi and continue to appreciate, and prepare for the expansion of the two-way volatility of the renminbi. However, although the People's Bank of China has raised the central parity of the RMB against the US dollar in recent days, and the median price can usually establish the exchange rate trend, the RMB continues to fall, which shows that the market power is strong.
A foreign exchange strategist at Royal Bank of Scotland (RBS) said in a research report that the depreciation of the renminbi is a sign of a slowing economic slowdown and that the exchange rate may depreciate further. The bank expects the yuan to fall another 2.3% from its current level.
The unexpected fall in the renminbi prompted HSBC Holdings (HSBC) and other institutions to cut their expectations for the appreciation of the renminbi. The largest foreign bank in China, on Friday, expects the yuan to be at the level of US$1.14 to US$6.14 by the end of this year, compared with the previous forecast of 5.98 yuan. The dollar was quoted at 6.2536 yuan against the yuan on Friday.
On Friday, the yuan once fell 1.6% from the middle price, the biggest gap ever. Such a downturn may also lead to a more tense relationship between China and the US trading partners. Although the renminbi has risen more than 30% since 2005, the United States and other countries are still putting pressure on China to allow China to allow the renminbi to appreciate further.
Global fund managers' concerns about China are mainly concentrated on China's economic slowdown, accumulated debt and rising default risk. According to data from Australia & New Zealand Banking Group Ltd. and EPFR Global, investors redeemed $275 million from Chinese equity funds this week, the largest outflow in Asia.
Although the decline of the renminbi is beneficial to exporters, it also brings financial risks. This week, the US dollar against the renminbi broke through the important psychological position of 6.25 yuan in both local and offshore markets. Analysts estimate that due to the unexpected fall in the renminbi, there may be billions of dollars in target redemption forwards at this price. This type of contract is a highly leveraged derivative.
Geoff Kendrick, head of Asian foreign exchange and interest rate strategy at Morgan Stanley, estimates that the loss of these structured products at market prices could now be around $4 billion.
He said. Companies that have purchased target redeemable forward contracts are suffering losses, but few people have lifted their positions because they believe the yuan will rebound again, which will increase their chances of making up for losses later.
Funds that invest in dim sum bonds (referred to as renminbi-denominated bonds issued outside China) have also been dragged down by the fall of the renminbi. Since the renminbi was firmer last year, those funds that invested in dim sum debts performed better in similar funds in Asia. But this year's situation has turned sharply. According to data from Morningstar, these funds have fallen by an average of 1.7% this year.
Pheona Tsang, head of fixed income at BEA Union Investment Management Ltd. in Hong Kong, said the yuan is under pressure in the short term, but the dim sum bond market is generally not very scary because of China's fundamentals. (Trade surplus and higher interest rates) still provide support for the renminbi, and investors remain calm and stable. The company manages assets of $6 billion. Morningstar's data shows that the company's RMB bond funds have fallen 0.5% in the past two months.
Analysts and economists expect the yuan to continue to fall, with both the Dutch International Group (ING) and the Canadian Imperial Bank of Commerce (CIBC) expecting the yuan to fall to a level of $ 6.3. If the renminbi really falls to this level, it will hit the lowest level since September 2012, and it also marks that its cumulative decline this year will be close to 4%, which will be unprecedented.
Tim Condon, an Asian economist at ING, said the bank is considering a situation in which the renminbi is no longer unilaterally appreciated; the Chinese government's expansion of the renminbi trading range is aimed at increasing the risk of bilateral volatility in the renminbi, and it is true.
The renminbi has not yet shown signs of stopping the decline, which has aggravated the market's concerns about the further decline of the renminbi. At a time when economic growth is slowing, the yuan has fallen almost every day for three consecutive months.