GO
Loading...

Are we being complacent over the yuan's decline?

As China's yuan heads toward its steepest ever weekly loss, some analysts told CNBC investors could be underestimating the importance of the move.

The tightly controlled currency has fallen 0.8 percent so far this week and is heading towards its biggest weekly fall on record, Reuters reported. Many have interpreted the move as a signal that Beijing is on the cusp of widening its trading band and taking a step towards liberalization.

(Read More: Yuan to topple dollar as top reserve currency: Survey)

"This is manufactured by the People's Bank of China (PBOC), there's no question about it," Uwe Parpart, the head of research at Reorient Financial Markets, told CNBC.

Parpart told CNBC the Chinese government was deliberately calling attention to their currency ahead of the National People's Conference in early March, where decisions will be firmed up on the reforms outlined in Third Plenum meeting in November.

"Some of this stuff is going to happen and we think there's a pretty good chance that some time in the near future we will get a widening of the yuan band from 1 percent to 2 percent," he said.

The currency is currently allowed to rise or fall by 1 percent in either direction from a level fixed against the dollar set by the PBOC.

But according to Richard Jerram, chief economist at Bank of Singapore, analysts could be underestimating the full extent of the drivers behind the recent weakness.

(Read More: Is China getting ready to widen the yuan's band?)

"Nearly every commentator out there is reading this as a deliberate move by the People's Bank of China to introduce two-way risk, and as a prelude to widening the trading band, but I think they are being complacent over the reasons for the move," said Jerram.

"It could be that China is responding to the loss of some of its competitiveness as other Asian currencies weaken. If that is the case then it would suggest that the policy change signals some trouble in the region in terms of a growth problem," he added.

SeongJoon Cho | Bloomberg | Getty Images

Boris Schlossberg, managing director at BK Asset Management, voiced a similar view on CNBC Asia's Cash Flow on Friday.

"Perhaps [the] more real reason [for the yuan's recent slump] is the economy in China is not growing as fast, [and] they [the PBOC] would actually like to see the currency lower because they want to stimulate export demand as much as possible," he said.

(Read More: Yuan as a World Currency? Getting There Fast )

The yuan opened at 6.1275 per dollar on Friday, dipping to a 10-month low of 6.1806 in morning Asian trade, below the PBOC's midpoint for the fourth session in a row.

The move has attracted a lot of attention from analysts given that previously the yuan had always been perceived as a steady one-way bet.

The yuan rose roughly 12 percent against the dollar from June 2010 until mid-January this year, and has since fallen around 2 percent.

(Read More: Does the yuan's slide mark a major shift in policy?)

However, Paul Mackel, head of Asia currency research at HSBC, said he strongly disagreed that yuan weakness had anything to do with trying to revive China's rate of growth.

"I don't think this is a purposely designed weakness of the currency to actually try and support growth, I don't think that's the story," said Paul Mackel, head of Asia currency research at HSBC.

"If we are actually going to be worried about Chinese growth, seeking a weaker currency is not the way to go about it. It's going to use other policy tools to try and support the economy," he said, referring to the use of monetary policy.

— By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

Contact FX

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More