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Updated January 4th, 2024 at 11:14 IST

China’s Yuan declines to 3-week lows amidst dollar's rebound

Indicators of capital outflows include global long-only funds rapidly selling China equities in December, marking the fastest pace of 2023

Yuan
Yuan | Image:Pexels Photo
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China's Yuan falls: The Chinese yuan reached a three-week low against a strengthening US dollar on Thursday, influenced by concerns about China's economy and signs of increasing capital outflows. 

Despite China's central bank establishing a firmer guidance rate before market opening, the spot yuan dropped to its lowest level since December 13, reaching 7.1598 against the dollar. The prevailing sentiment reflects apprehensions about China's economic recovery.

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According to the latest China outlook report from US consultancy Rhodium Group, a cyclical recovery with a growth rate of 3.0-3.5 per cent in 2024 is anticipated, driven by a potential bottoming out of the property market. 

However, a structural slowdown is expected to persist as the dominant economic narrative for years to come.

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Indicators of capital outflows include global long-only funds rapidly selling China equities in December, marking the fastest pace of 2023. This trend was driven by the need to meet redemption requests and diversify away from China, resulting in a combined net outflow of $3.8 billion from China and Hong Kong equities managed by active long-only managers. This represents the third-largest monthly outflow on record, according to a report from Morgan Stanley.

The yuan's depreciation is also attributed to the rebound of the US dollar index, as traders reevaluate the timing of the US monetary policy pivot. 

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Federal Reserve officials initiated a comprehensive discussion about an upcoming shift in US monetary policy during the December 12-13 meeting. 

Market participants are reassessing expectations of an early interest rate cut, considering the indication that rates will remain at elevated levels.

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Christopher Wong, a strategist at OCBC Bank, noted that investors are revising their expectations following the Federal Open Market Committee's (FOMC) minutes, which confirmed the end of the Fed's rate hike cycle. 

However, the absence of a discussion on the timing of a rate cut, as mentioned by Chair Powell, could be disappointing to USD bears, according to Ken Cheung, Chief Asian FX Strategist at Mizuho Bank. 

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Additionally, the recent savings rate cuts among Chinese banks have raised the possibility of a policy rate cut as early as January.

(With Reuters Inputs)

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Published January 4th, 2024 at 11:14 IST

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