Yuan tumble unlikely despite weakening

A residents shows China's RMB and US dollar banknotes in Qionghai, south China's Hainan Province, Jan. 7, 2016. (Xinhua file photo/Meng Zhongde)

Though the Chinese currency renminbi, or the yuan, weakened to a six-year low against the U.S. dollar Friday, analysts said a sharp drop is unlikely despite persistent depreciation pressure.

The central parity rate of the yuan retreated 247 basis points to 6.7558 against the dollar, according to the China Foreign Exchange Trade System (CFETS), the lowest level since September 2010.

The recent yuan depreciation can be attributed to a stronger dollar and growing downward pressure on the Chinese economy due to a possible correction in the high-flying property market, said Ren Zeping, chief economist at Founder Securities.

The U.S. dollar index, which measures the greenback against six major currencies, has hit its highest level since March following positive economic data from the country.

The dollar may ascend to even higher levels amid mounting speculation that the Federal Reserve would raise the interest rate by the end of the year, analysts said.

China's reform to make its exchange rate mechanism more market-oriented also lead to higher volatility for the yuan, Wang Chunying, spokesman for the State Administration of Foreign Exchange, said at a press conference.

Analysts believed despite short-term volatility from a stronger dollar, the yuan will maintain overall stability and the chance for a sharp depreciation is slim, backed by stable economic growth, balanced fiscal condition and ample foreign exchange reserves.

China's economy expanded at a steady 6.7 percent in the third quarter of the year, on track to meet the government's full-year growth target of 6.5 to 7 percent, as increased government spending and a property boom offset stubbornly weak exports.

To cool the property market amid concerns about asset bubbles, more than 20 major cities imposed home purchase restrictions early this month, which analysts said may weigh on growth over the coming quarters.

"A soft yuan could be expected to help bolster the economy somewhat, which could partially offset the possible slowdown in domestic demand due to property tightening," said Zhou Hao, Senior EM Economist Asia with Commerzbank.

Analysts expected the exchange rate of the yuan to fluctuate between 6.8 and 6.65 against the dollar in the near future, and there will be solid support around 6.8.

"Given the fact that China's foreign exchange reserves fall to five-year low in September, it's important to control capital flows at this point," said Hong Hao, managing director and head of research at BOCOM International.

Sharp yuan depreciation will drive more domestic investors seeking overseas asset allocation, fueling capital outflow. "The central bank will intervene to some extent in case of drastic fluctuations to minimize its risks," Hong said.

It's noteworthy that while the yuan exchange rate against the dollar has reached the weakest in six years, the yuan is relatively stable against a basket of currencies.

The yuan exchange rate composite index, which measures the yuan's strength relative to a basket of currencies including the dollar, euro and Japanese yen, strengthened 0.57 percent compared with the end of September to 94.64 on October 14, according to the latest CFETS data.

Zhu Haibin, China Chief Economist at J.P. Morgan, said China will focus more on the stability in trade-weighted exchange rate rather than bilateral dollar/yuan exchange rate.

"This could provide a transparent scheme to anchor market expectations," Zhu added.