SHANGHAI: China’s yuan touched a near one-week low against a firmer dollar on Thursday, dampened by investor expectations of larger liquidity injections by the central bank in June as local governments step up bond issuance to support the economy.
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.7095 per dollar, 444 pips or 0.7% weaker than the previous fix at 6.6651.
In the spot market, onshore yuan opened at 6.6900 per dollar and eased to 6.7070, the weakest level since May 27. By midday, it was changing hands at 6.6984, 126 pips softer than the previous late session close.
Analysts expect the yuan may depreciate further as the central bank needs to inject more funds to plug a liquidity gap after the cabinet announced a slew of policy stimulus measures to support the economy.
“Government bond issuance may peak in June,” analysts at OCBC Wing Hang Bank said in a note, expecting such issuance could force the PBOC to offer cash via its medium-term policy loans or by cutting bank reserve requirement ratios. The PBOC might tolerate any resulting weakness in the yuan, they added. Chinese provinces are racing to issue some $225 billion of bonds in June, frontloading investment to revive the COVID-battered economy even as policy advisers step up calls for further debt issuance in the second half.
“Overall, from financing perspective, the overall net financing of government debt is likely to hit 1.7 trillion yuan in June,” said Ming Ming, chief economist at CITIC Securities.
Currency traders said some market participants took profit on their long dollar positions when the yuan weakened past the key 6.7 per dollar level, limiting its drop in morning trade.
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