China: further devaluations before the end of the year

On August 11, China’s central bank, PBOC, announced that it had decided to improve its central parity system so that the exchange rate of the Chinese renminbi against the U.S. dollar would better reflect the market situation.

In China’s spot foreign exchange market, the Yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day.

The central parity rate of the yuan against the U.S. dollar is based on a weighted average of prices offered by market makers before the opening of the interbank market each business day. On August 12th, it decreased by 1,008 basis points to 6.3306, according to the Chinese Foreign Exchange Trading System. The A-share market was slightly influenced by the news on August 11th, as the Shanghai Composite Index went down by 0.01%.

We are not surprised by the PBOC’s action. After all, freeing the FX market has been a long term goal for authorities and been discussed in many occasions. Such intervention is necessary and an important movement to enhance the independence of the FX market. This time, the floating range extended to 2% turned out to be quite manageable and we don’t think it’ll lead to a crisis. The fact that the announcement was made out of blue is what made the markets tremble a little bit. We expect the renminbi to depreciate by 5% by the end of the year, which means an additional 3% decrease. Thus, in the short run, the A-share market is expected to be overlaid with depreciation pressure and should keep fluctuating.

Hong Chen – Chief Investment Officer (CIO) – UBP Investment Management (Shanghai) Limited