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(XINHUA FINANCE)The Chinese currency renminbi, or the yuan, has been weakening against U.S. dollar since the beginning of 2016, and shows no signs of reversion.
On Jan. 6, the central parity rate of the yuan was 145 basis points lower than the previous day, stood at 6.5314 per U.S. dollar, the weakest point since April 2011. It has declined for seven straight days. In the first three trading days of 2016, the central parity rate of the yuan has down 378 basis points against the U.S. dollar.
At 9:15, when the central parity rate is announced, CNH sharply declined 400 basis points from around 6.6370 yuan per U.S. dollar to 6.6877 yuan per U.S. dollar, representing a single day loss of more than 0.6 percent. As at 19:45 on Jan. 6, the minimum CNH exchange rate posted 6.7321 yuan per U.S. dollar, dropped over 800 basis points; the exchange rate of CNY against U.S. dollar hit at around 6.55.
Offshore Chinese yuan has in aggregate depreciated over 2.2 percent since the beginning of 2016. But what have caused yuan to keep falling?
Guess 1: Concentrated Individual Foreign Currency Purchase
Entering 2016, the annual foreign exchange purchase limit for individuals is set at 50,000 U.S. dollars per head. Impacted by yuan’s depreciation expectation, the concern over the market that concentrated individual foreign exchange purchasing might occur in 2016 has turned into reality. Several institutions, including China International Capital Corporation, Sinolink Securities Co., Ltd. (600109.SH), all believe that the impacts of large scale foreign exchange purchase on yuan depreciation are showing up.
Guess 2: The PBOC Intends To Test The Bottom Of The Market
It is obvious that the triggering factor of accelerated yuan depreciation is unexpected drop of central parity rate of yuan, which is regarded as the will of the PBOC, the central bank of China. On Jan. 4, the first trading day of the year, the central parity rate of yuan against U.S. dollar depreciated 96 basis points, the largest decline since foreign exchange reform on Aug. 11, 2015. Decline on that day strengthened depreciation expectation of CNY and CNH. In the subsequent two trading days, the central parity rate of yuan again decreased by 137 and 145 basis points, respectively. Goldman Sachs pointed out in a latest report that Chinese government showed strong intention of guiding the depreciation of yuan in recent days.
Guess 3: The Federal Reserve To Raise Interest Rate Again
Since Federal Reserve has already pushed the button of rate hike, when will it raise rate again is another uncertainty hanging over yuan. Citic Securities Company Limited believes that under the background that Federal Reserve raises interest rate by 1 percent (four times a year), the yield of U.S. 10-year Treasury bond may increase by around 3.2 to 3.3 percent. And the narrowed interest spread between China and the U.S. would result a 5 percent depreciation of the Chinese currency.
Guess 4: Adjusting The Exchange Rate To Support Economic Recovery
Lu Zhengwei, chief economist with Industrial Bank Co., Ltd., estimated that yuan would depreciate 15 percent throughout 2016 to hit 7.3 yuan per U.S. dollar. He indicated that China’s economic recovery requires corresponding adjustment of the real effective exchange rate of the yuan. Substantial depreciation of renminbi provides impetus for the improvement of fundamentals for Chinese companies, especially those in the second industry. It is also the only key that ensures the independence of central bank’s monetary policy in the “impossible trinity” of exchange rate liberalization, capital account convertibility and monetary policy independence.
Guess 5: To Stabilize Yuan Exchange Rate Index Of China Foreign Exchange Trade System (CFETS)
Liu Dongliang, senior analyst at China Merchant Bank, is in the view that significant depreciation of yuan is primarily ascribed to stronger U.S. dollar and weaker currencies outside of the U.S., such as Euro. If renminbi exchange rate remains constant, the index of will absolutely rise. In order to keep CFETS index basically stable, yuan must depreciate against U.S. dollar. Last December, China released CFETS renminbi exchange rate index, aiming to make references more to a basket of currencies.
What Are The Influences On People’s Life?
Firstly, those who are going abroad are most likely to be affected. Most of them are students to study abroad. They will have to spend more on tuition fees and living costs, since more renminbi are required in exchange for the same amount of foreign currencies.
Secondly, those who will have to deal with foreign currencies will also be affected. To be specific, those who like to do overseas shopping online. As this group of people like to buy overseas goods, such as apparels and cosmetics of famous brands, which all have to be paid in foreign currencies. As renminbi depreciated, to exchange equal amount of foreign currency requires more renminbi. More money has to be spent to buy the same item. “As a shopping agent, I guess the profit margin will be squeezed out,” Ms Liu, who opened an online store on WeChat Monments and purchasing stuffs from Hong Kong for clients, told the reporter. Impacted by continuous yuan depreciation, her orders apparently declined in recent days.
Also, tourists to travel abroad will be affected. Both DIY travelers and package tour can’t be free from this influence. Because travel agencies will increase the price of corresponding outbound travel routines as the cost goes up.
In addition to the abovementioned direct impacts, yuan depreciation also has other indirect influences on Chinese people. For example, a few years ago when yuan appreciated, huge amount of foreign capital flowed into China’s real estate industry. As yuan is depreciating now, foreign capitals may flow out, which will definitely have impacts on China’s real estate, especially those in the first tier cities. But it is still hard to say whether housing prices will rise or fall.
Besides, following the depreciation of yuan, prices will hike. Given China has already under inflation, the money will be less and less valuable and people’s purchasing power will decline.
How Should People Cope With Yuan Depreciation?
Liu Weiming, senior analyst with China CITIC Bank, predicted that renminbi exchange rate is largely affected by policies and short-term capital demand and supply. People with demand for foreign exchange purchase may adopt an even foreign exchange purchasing strategy similar to regular and fixed amount investment, to reduce costs.
Furthermore, people are advised to buy some foreign currency financial products and QDII funds. Meanwhile, transactions involve foreign currencies, such as overseas shopping online and traveling abroad should be reduced and delayed.
At last, we had better explore more wealth management channels to preserve and increase the value of money.
Will There Be Massive Devaluation Again?
In the view of Liu Dongliang, the average daily fluctuation of onshore yuan exchange rate records only around 0.4 percent amid the massive fluctuation of yuan in recent three days. It is just conventional fluctuation in international foreign exchange market since the average daily fluctuation of most of the mainstream currencies can reach around 0.5 percent. “yuan is not suffering extreme fluctuation now but is gradually moving to normal state from past repression. Both enterprises and individuals should be ready to face normalized average daily fluctuation of yuan by 200-300 points.”
However, analyst from Goldman Sachs indicated in its report on Tuesday that yuan has almost fallen back to the fair value instead of overvalued. Previous report by Goldman Sachs shows that the price drop of oil will push up China’s surplus of current items, offsetting the pressure on capital outflow brought by the devaluation of yuan. It is expected that China’s international balance of payment will keep fit, hence yuan will see limited pressure on devaluation in the future.
Impact On Stock Market
Bearish Impact:
Non-ferrous Metals, Aviation, Real Estate, Financial Industry
China Eastern Airlines Corporation Limited (600115.SH; 00670.HK) announced on Jan. 5 that to ease the risks brought by exchange rate fluctuation, the company recently paid off debts dominated in the U.S. dollar with a principal of 1 billion U.S. dollars so as to lower the ratio of debts dominated in the U.S. dollar. Research report by Essence Securities Co., Ltd. shows that the financial cost of Eastern Airlines in the first three quarters recorded 3,794 million yuan, representing a year-on-year growth of 809.83 percent. The performance of Eastern Airlines was eroded by exchange loss.
Bullish Impact:
Shipping, Textile, Iron & Steel, Chemical, Automobile
Industrial insider indicates that the devaluation of yuan might stimulate the exporting of domestic industries including textile and iron & steel, thus benefiting container shipping to some extent. The devaluation of yuan will step up the purchasing cost of importing enterprises, but might benefit chemical enterprises oriented in exporting.
