Yuan sees sharp drop against dollar

The yuan last week experienced the biggest weekly slide in onshore trading against the US dollar in more than three years, which could be a result of the US pullback from its quantitative easing (QE) program, analysts said Sunday.

The Chinese currency was trading at 6.0914 yuan to the dollar by close of trading Friday, down 0.5 percent for the week, according to the China Foreign Exchange Trade System.

Although the change was small in comparison with drops last week in other emerging economies' currencies, it represented a big swing for the yuan, which is tightly controlled and rarely volatile. The last time that China recorded a similar drop was in November 2010, the Wall Street Journal -reported Friday.

Market rumors circulated Friday, claiming that the People's Bank of China (PBC), the central bank, was intentionally cooling the yuan's appreciation as a large amount of foreign capital had been flooding into China recently.

However, China's Finance Minister Lou Jiwei told Bloomberg Sunday that the recent yuan decline was "within the normal range" and "there will be ups and downs."

"You can't say the yuan is starting to depreciate just because of small volatility," Lou said in Sydney, where he was attending a meeting of the Group of 20 finance ministers and central bankers.

Zhang Lei, a macroeconomic analyst with Minsheng Securities, told the Global Times Sunday that the US Federal Reserve's move to wind down its massive bond-buying stimulus program had contributed to the yuan's depreciation.

"Investors expect the dollar to appreciate. And after the yuan had appreciated for a while, it is natural for the currency to experience some small and short-term fluctuations," he said.

Three Federal Reserve officials from St. Louis, San Francisco and Atlanta said last week that they believed the US economy was gaining traction, thus allowing room for further tapering of the QE program, Reuters reported Wednesday.

Further tapering of QE will push up demand and thus the price of the dollar, and lead to the yuan's depreciation, Lian Ping, chief economist at Bank of Communications, told the Global Times Sunday.

The yuan has risen by 36 percent against the dollar since it was unpegged from the US currency in July 2005.

The easing of China's GDP growth - which slowed down to 7.7 percent last year, lower than the level in previous years - and disappointing recent data for the country's manufacturing industry could also have contributed to the yuan's slide, the economists said.

The depreciation, however, was not systemic and would not be sustained, they noted.

"It is impossible for depreciation to last too long," Lian said. "The fundamental drivers of the yuan's appreciation still exist and remain strong."

China will maintain its trade surplus and strong capital inflow in 2014, which will increase demand for the yuan and result in its appreciation, Lian said.

China's January exports increased by 10.6 percent year-on-year and its trade surplus expanded by 14 percent year-on-year to reach $31.9 billion, the General Administration of Customs said on February 12.

Both Zhang and Lian said it was unlikely that the depreciation was a result of the PBC trying to limit capital inflows. "There is very little possibility that the PBC would have intervened in the market so much - shifting market expectations of yuan appreciation to depreciation," Lian said.

"The yuan will likely appreciate a little, somewhere around 3 percent, in 2014," he said.