Analysts forecast gradual depreciation as China grapples with global slump
HONG KONG (MarketWatch) -- China's currency is expected to continue to weaken against the U.S. dollar in coming months, albeit at a moderate pace, as authorities weigh the political and economic benefits of a weaker currency in propping up the export-oriented economy.
Analysts say a measured decline in the yuan lasting about six months would not be out of tune with statements by senior Chinese economic leaders Wednesday calling for the yuan to remain "overall stable at a reasonable equilibrium level."
"They want to send a message that they could depreciate the currency a little bit," said Sebastien Barbe, senior economist for Asia, Calyon Credit Agricole, in Hong Kong. "They want to avoid a shock on expectations and igniting capital outflows."
References to the currency were issued Wednesday by China's top leadership at the conclusion of the three-day Central Economic Conference, a forum which usually sets the tone for economic policies in the coming year.
Analysts said currency stability was understood by the market to mean limited movement against the dollar and other leading currencies on a weekly basis. Bigger moves, they say, could spark an exodus of investment capital, copy-cat devaluation among regional neighbors, and protectionist sentiments with leading trading partners.
"From my point of view stability means no big fluctuations, it does not mean absolute stability of the currency versus the U.S. dollar," Barbe said, adding the yuan could fall up to 6% against the dollar over the coming half year.
The dollar was trading at 6.8511 yuan on the over the counter market around midday in central Asia, down from Wednesday's close of 6.8633 yuan. The dollar parity rate was set at 6.8471, little changed from its level of 6.8622 Wednesday.
Further weakness in the yuan would extend a trend change that began Dec. 1 when it fell by its daily limit 0.5% against the dollar, a move that analysts say signaled China no longer viewed a stronger currency as desirable.
Economists believe currency devaluation would do little to spur overseas demand for Chinese made goods.
Still, a small-scale easing might have political benefits and help shore up company earnings which are being squeezed by a "growth shock" as China's export's growth decelerates.
"It an important political message to companies and migrant workers losing their jobs," said Dong Tao, chief economist Greater China for Credit Suisse in Hong Kong. "China's problem is not losing competitiveness but that demand disappeared."
Tao added that he expected China to move into deflation for a brief period next year.
Falling prices, he added, would further pressure corporate earnings and damp consumer spending at a time when the economy is already slowing, presenting a major challenge for policy makers.
Data released Wednesday showed China's exports declined 2.2% in November on year, the first such contraction in more than seven years, underscoring the severity of the global slowdown. The decline was the first on a monthly basis since February 2002.
