Economists predict changes in China's forex policy

The value of the Chinese currency Renminbi, or the yuan, has fallen against the U.S. dollar for five consecutive trading days. It weakened 13 basis points to 6.1189 against the greenback on Monday.

It has fallen 136 points during the past five trading days, after dropping 20 basis points on Tuesday, dipping another 30 points on Wednesday, declining 43 points on Thursday and shedding 30 points on Friday, according to the China Foreign Exchange Trading System.

Economists predict the depreciation may signal a change in China's exchange rate policy with increased two-way volatility ahead.

The yuan depreciation is due to a combination of a USD-RMB exchange rate fix and concerns over China's growth outlook, they said.

The yuan has dropped by more than 200 basis points against the U.S. dollar this year. In China's foreign exchange spot market, the yuan is allowed to rise or fall by 1 percent from the central parity rate each trading day.

The yuan started rising against the U.S. dollar from 8.11 in July 2005, when China reformed its exchange rate mechanism. Appreciation quickened in 2013 and its value rose 3 percent, compared with 0.25 percent in 2012.

In the past few days, both the daily yuan-against-the-U.S.-dollar fixing and the spot rate have weakened, causing a market stir.

It is somewhat surprising given the stronger-than-expected January export growth rate and strong foreign exchange inflows so far this year, said Wang Tao, chief China economist at UBS.

China's January exports surprised the market with a 10.6-percent rise year on year, far exceeding market expectation of less than 2 percent.

Until recently, the RMB has appreciated steadily against the U.S. dollar, and with little volatility, Wang said.

This is in sharp contrast with other emerging markets and key Asian currencies, most of which have depreciated significantly.

As a result, China's trade-weighted exchange rate against a basket of its major trading partners' currencies has appreciated by almost 20 percent in real terms since 2010 and by more than 10 percent in 2013, she said.

The impact of yuan appreciation in 2013 is set to be felt in 2014, limiting the strength of China's export recovery this year. As such, the era of steady yuan appreciation may be drawing to a close, Wang said.

"The shift away from the previous steady pace of appreciation could unwind 'hot money' inflows," she said.

This will not necessarily lead to a credit tightening, but it does pose challenges for liquidity management by the People's Bank of China (PBoC, central bank), she added.

Wang Jun, senior foreign exchange strategist with HSBC, said the PBoC has been fixing the exchange rate between the U.S. dollar and the yuan higher after the Chinese New Year holiday.

"This suggests that the central bank wants to take advantage of the relative calmness in the external market to reduce RMB appreciation expectations," Wang Jun said in a research note.

Unsatisfactory macro economic data in January and February may have also contributed to the depreciation of the yuan.

The resumption of the usual softer seasonality in China's trade balance in February and March may have reduced spot U.S. dollar supply from exporters in the Chinese mainland, Wang said.

The most recent catalyst is related to the HSBC China flash manufacturing PMI released on Feb. 20, which hit a seven-month low.

Wang Jun maintained that the central bank could carefully calculate the USD-RMB fix after the market's aggressive appreciation expectations have eased.

In the past, the USD-RMB fix has tended to move higher going into or during the annual meeting of the National People's Congress in early March, but most of the time would fall after that meeting, Wang Jun added.