OCBC says China's focus on yuan value against currency basket is working

OCBC: Yuan basket system is positive for investors

OCBC has forecast a weaker by year-end, saying that the country's new focus on a basket-valuation of the yuan had been effective.

OCBC economist Tommy Xie told CNBC's "The Rundown" that the bank expected "mild depreciation" in the Chinese currency, largely due to a stronger dollar on the back of expected monetary tightening from the U.S. Federal Reserve.

The value of the currency has a talking point in recent days, with U.S. Treasury Secretary Jack Lew saying on Sunday that a market-driven yuan would benefit Chinese consumers' purchasing power.

"It's fundamentally in China's interest not to have an undervalued exchange rate," Lew told students in Beijing, ahead of the two-day U.S.-China Strategic and Economic Dialogue that started on Monday.

A customer holds a 100 Yuan note at a market in Beijing.
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OCBC's Xie said there were signs that China was moving toward the market currency system, although it still issued a daily midpoint fix against the dollar for the yuan.

In December China introduced a new exchange rate index that valued the yuan against a basket of 13 trade-weighted currencies, which was read at the time as the country preparing for a stronger dollar as the U.S. Federal Reserve began hiking interest rates.

Experts said then that by focusing attention on the currency's value against a broader range of currencies, China should be able to allow the yuan to gradually fall without sparking market unease.

Indeed, the yuan, Xie noted, had become more predictable, with the currency weaker against the basket of currencies since March.

"Since March, PBOC [People's Bank of China] has been following the basket system very closing," he said, adding that that was reassuring the market, which had remained calm despite the yuan falling 2 percent against the dollar in May.

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"One of the key reasons is because China is moving towards this basket system, which is giving market some guidance and communication, which makes us feel comfortable with the current environment," Xie said.

On Friday, however, Goldman Sachs said it had moved to an "outright negative" view on the yuan, blaming the change in sentiment on a "weak link" in the mainland's currency management strategy.

The bank's analysts said although Beijing had moved changed its focus to the yuan's strength against a basket of currencies, Chinese consumers and businesses had not shifted their mindset away from the currency's dollar exchange rate.

This could lead to a panicked outflow if the currency continued to weaken against the greenback, the bank's analysts warned.

- Leslie Shaffer contributed to this article.

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