Weak trade data could cloud yuan prospects

The yuan will likely face rising depreciation pressure throughout next year, economists said, as the currency fell the most in six years on Tuesday after the release of weak trade data.

The currency slid by more than 0.5 percent to 6.2059 per dollar during intraday trading, the largest intraday loss since 2008.

The spot rate against the dollar has declined by 0.78 percent since the central bank cut interest rates on Nov 21.

The declines indicate weakening market sentiment toward the yuan despite the central bank's effort to maintain the yuan's value against the dollar by lifting the central parity rate by 0.08 percentage point on Tuesday.

November's disappointing trade performance, announced on Monday, also cast a shadow over prospects for the economy. Imports fell 6.7 percent year-on-year while exports expanded just 4.7 percent, the slowest pace in six months.

Investors expect more monetary loosening, including cuts in banks' required reserve ratios, to shore up the economy, analysts said.

A stronger dollar and possible capital outflows sparked by concerns over diminishing returns from yuan-denominated assets will exacerbate pressure on the Chinese currency, they said.

Wang Tao, chief economist in China at UBS AG, forecast that the yuan will ease to 6.35 per dollar by the end of 2015, even though China posted a record trade surplus of $54.5 billion in November.

The conventional wisdom is that a country usually faces greater pressure to appreciate its currency when its trade surplus is high.

Wang said that the narrowing gap between onshore and offshore interest rates will slow the pace of capital flows into China, while the liberalization of the country's capital account could trigger capital outflows. Both factors would weigh on the value of the yuan.

The People's Bank of China has been reluctant to guide the yuan's benchmark exchange rate lower, although it has attempted to signal the market with two-way volatility by widening the trading band to 2 percent around its reference rate earlier this year.

Craig Chan, a foreign exchange analyst at Nomura Securities Co Ltd, said that it is strategically important for Beijing to maintain a stronger yuan.

"A weakening yuan will bring Beijing greater pressure from its trade partners. It will also hurt the process of the yuan's internationalization and the nation's goal for it to become an international reserve currency," he said.

Chan said that two factors — the ongoing Central Economic Work Conference and the year-end effect — will drive the PBOC's fixing of the yuan against the dollar lower toward 6.1 by the end of this year.

Some analysts remain bullish on the long-term trend of the yuan. They termed the recent easing as a mild correction and said that the PBOC will not change its policy stance, which is to maintain a stable currency with two-way volatility.