×

China sets yuan fixing at four-year low

An investor observes stock market at a stock exchange hall in Nanjing, Jiangsu province, China.
Getty Images
An investor observes stock market at a stock exchange hall in Nanjing, Jiangsu province, China.

The People's Bank of China Wednesday set the mid-point rate for the yuan at the lowest level in more than four years, as heavy capital outflows and a slowdown in the world's second-largest economy weigh on the currency.

The yuan's mid-point was set at 6.414 per dollar Wednesday, its lowest since August 2011, compared with 6.4078 on Tuesday. China's central bank lets the yuan spot rate rise or fall a maximum of 2 percent against the dollar relative to the official fixing rate.

But it's not entirely clear that the fresh four-year low represents a huge step. Yuan in the spot market fell to 6.4244 against the dollar following the fix, but the move was a modest 0.1 percent.

"Unless there's a significant difference between the fixing rate and yesterday's close, I don't think you should read too much into the figure," said Julian Evans-Pritchard, China economist for Capital Economics.

Wednesday's decline in the fixing was just 0.1 percent, slightly less than Tuesday's 0.15 percent change and Monday's 0.2 percent. That pales with the 1.86 percent downshift on August 11, when the PBOC announced its shift to a market-based fixing mechanism.

Evans-Pritchard noted in a phone interview that since the August reform, the fixing is supposed to be based on quotes from market makers and it's no longer directly controlled by the PBOC.

Earlier this week, Evans-Pritchard published a note estimating that China's net capital outflows totaled $113 billion last month- the largest on record- accelerating from $37 billion in October.

Observers note that the outflows reflect expectations for the yuan to weaken further as China's economy slows and Wednesday's move may signal that the PBOC is giving a somewhat mixed blessing to the yuan's decline.

"The problem is the PBOC appears reluctant to allow significant depreciation as it would set back international use of the currency and rebalancing toward consumption," Evans-Pritchard said. "It's a balancing act with some depreciation, but it's still selling assets to prevent the currency from weakening too quickly."

Evans-Pritchard isn't alone in seeing the latest fixing as only a small step. Jason Daw, head of Asia foreign-exchange strategy at Societe Generale, said Wednesday's fixing was only part of a gradual rise in the dollar-yuan currency pair.

But since the latest fixing exceeded the August level, "it could serve to reinforce market expectations that further depreciation will be forthcoming. The market is apt to interpret the fixing as the PBOC being comfortable with further weakness," Daw said via email. He expects the U.S. dollar will be fetching 6.80 yuan by the end of next year.

The declines in the yuan come amid continuing concern about mainland's economic slowdown.

Chinese growth dipped to 6.9 percent in the third quarter, dropping below the 7 percent mark for the first time since the global financial crisis of 2008-2009, sparking concerns of a hard landing in China after years of explosive growth.

The softness in the economy was also reflected in inflation data released Wednesday. China's Producer Price Index (PPI) dropped 5.9 percent on-year in November, in line with a Reuters poll of economists, data from the National Bureau of Statistics showed.

China's Consumer Price Index (CPI) rose 1.5 percent in November from the same period a year ago.

"Widespread declines in prices of tradable goods pressure the Chinese government to allow the yuan to depreciate substantially more than it has to date, since a weaker yuan would put upward pressure on yuan-denominated prices of tradable commodities and manufactured products and ease deflationary risks," Bill Adams, senior international economist at PNC Financial Services, said in a note Wednesday. "The yuan's depreciation seems likely to accelerate in 2016."

Also on Wednesday, China's finance ministry announced it would revise some import taxes, particularly to encourage imports of advanced equipment, according to a Reuters report. The mainland also plans to expand tax cuts on consumer goods, the report said.

That follows data released Tuesday showing China's exports slumped more than expected in November, falling 6.8 percent from a year ago, dropping for a fifth month, while imports fell 8.7 percent over the same period. The trade figures compare with a Reuters' analyst poll of a decline of 5.0 percent for exports and a fall of 12.6 percent for exports.

-Neelabh Chaturvedi and Huileng Tan contributed to this report.