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Yuan hits fresh 2012 low, slow depreciation seen
May 30, 2012 / 5:22 AM / 5 years ago

Yuan hits fresh 2012 low, slow depreciation seen

SHANGHAI (Reuters) - The yuan fell against the dollar on Wednesday, hitting a fresh 2012 low, as the dollar index reached its highest level since September 2010 in Asian trade amid lingering worries over political and economic troubles in the euro zone.

Different values of China's yuan banknotes are seen in this photo illustration taken in Shanghai April 15, 2012. REUTERS/Petar Kujundzic

Spot yuan hit an intraday low of 6.3561 per dollar in morning trade, its lowest level since mid-December. It touched an intraday high of 6.3522 and was trading at 6.3552 at midday, slightly weaker than Tuesday’s close of 6.3480.

The People’s Bank of China (PBOC) set the yuan’s midpoint at 6.3297 against the dollar, slightly weaker than Tuesday’s 6.3262 but stronger than Tuesday’s close, giving a clear signal that it may allow the yuan to depreciate but only at a controlled pace.

“China appears ready for a round of yuan depreciation,” said a trader at a Chinese state-owned bank in Beijing.

“But gradualism is typical of China’s currency policy. The PBOC will use the same strategy it used for yuan appreciation in the previous few years. This time, it will let the yuan depreciate but at a slow and steady pace the same as before.”

The yuan has shed 0.71 percent this month and 0.96 percent so far this year under pressure from a strengthening dollar as well as China’s worse-than-expected economic slowdown.

The dollar index .DXY hit a fresh recent high of 82.633 in Asian trade on Wednesday as the euro fell, nearing a two-year low, hurt by worries about Spain’s soaring borrowing costs.

Growth in China’s gross domestic product slowed to a near three-year low of 8.1 percent in the first quarter. Many economists now expect GDP growth could fall below 8 percent in the second quarter.

NEW STIMULUS PROGRAMME?

A slow and steady pace of yuan appreciation will be in line with China’s latest moves to boost its growth while trying to avoid the negative impact seen from a two-year, massive 4 trillion yuan ($630 billion) stimulus program.

Global financial markets have been caught in a frenzy of speculation on the subject, which lingered on Wednesday.

Local media reports in China began the day on Tuesday citing unconfirmed talk that Beijing was readying fresh stimulus. By the end of the trading day in China the tone had reversed.

Media began citing a microblog reference to a news briefing, purported to have been held by the National Development and Reform Commission (NDRC), denying that a stimulus package like the one during the global financial crisis was in the pipeline.

The original Twitter-like microblog entry, reported by local media to have been on the official Xinhua microblog, could not be found when checked by Reuters. There was no mention of it on the Xinhua newswire or its public website.

The NDRC, the country’s top economic planner’s website carried no reference to the report, or a news conference and declined to comment when contacted by Reuters.

The Chinese academic circle has said that China needs an appropriate amount of investment to spur economic growth but Beijing should not launch a new round of aggressive fiscal stimulus.

“I don’t think the government will launch another massive stimulus program to add to overcapacity in many industries,” said a dealer at a European bank in Shanghai.

“But that will not persuade it from boosting investment in some special fields and regions to help economic growth.”

For sure, Beijing has announced some steps in selected fields and areas, including approving investment projects in its interior regions, encouraging private firms to play a bigger role in areas such as finance and banking, and offering subsidiaries to auto and appliance consumers.

Offshore one-year non-deliverable dollar/yuan forward contracts traded at 6.4130 in the afternoon session, implying a yuan depreciation of 1.3 percent to Wednesday’s midpoint.

Offshore spot yuan was trading around 6.3551 in morning trade, slightly stronger than the onshore spot yuan.

Editing by Jacqueline Wong

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