China's yuan briefly fell on Thursday and remained below the official fixing, which the central bank again set lower, a trend that is likely to continue as China prepares for market reforms. Traders say the People's Bank of China (PBOC) is poised to kick off a fresh round of foreign-exchange market reform by introducing more two-way volatility in the run-up to the widening of daily trading band, expected as early as in March.
The PBOC set Thursday's midpoint at 6.1224 yuan per dollar, down 0.05 percent from Wednesday's 6.1192. The yuan opened at 6.1258, and slid to an intraday low of 6.1273. The yuan recovered some ground to trade at 6.1245 per dollar near midday, almost no change from the previous day's close at 6.1248. It has fallen by about 1 percent in the past two weeks, a surprisingly large move given the currency's usual staid trading patterns.
"There is clear evidence of intervention from the PBOC. The recent yuan move is intended to discourage arbitrage inflows. If short-term capital inflows abate, the depreciation will probably halt," said Yao Wei, China economist at Societe Generale. Chinese banks posted a $73.3 billion surplus in spot foreign exchange settlements in January and a $25.4 billion surplus in forward currency settlements, according to statistics from the State Administration of Foreign Exchange.
The country's foreign exchange regulator said on Wednesday a dip in the yuan foreign exchange rate is normal as some investors unwind long bets on the currency, helping inject two-way exchange rate volatility over time. Analysts believe there is no base for sustained yuan depreciation due to China's large trade surplus, not to mention the country remains a relatively safe investment destination compared to emerging market peers, given its $3.82 trillion reserves. Analysts at Bank of America Merrill Lynch and OCBC Bank expect the yuan to end 2014 at 6 and 5.95 per dollar, respectively.
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