Worst of yuan rout over as China in control, Nomura says
BEIJING, Aug 14 — The biggest selloff in China’s yuan in two decades inevitably evoked the memory of the Asian crisis during the late 1990s.
Such a comparison is unwarranted as China has enough firepower to control its currency market, according to Nomura Holdings Inc. The worst of the selloff that started Tuesday is probably over, said Jens Nordvig and David Fritz, currency strategists at the bank.
China’s foreign reserves remain the largest in the world and enough to cover two years of imports even after shrinking to US$3.7 trillion (RM14.9 trillion) from a peak of US$4 trillion, according to Nomura. At 10 per cent of gross domestic product, foreign-currency debt is less than a quarter of the levels in Malaysia and Thailand as they headed into the financial crisis in 1997.
“While a more sustained move toward a weaker yuan seems quite probable, we are inclined to think the authorities will remain in control of the situation,” Nordvig and Fritz write in a report yesterday. “This suggests that gradualism will still be a part of policy-making in China, and this may mean that the worst shock effect is behind us.”
China’s surprise move to cut its daily reference rate by 1.9 per cent Tuesday roiled global markets, raising concern that it may trigger competitive devaluations. The central bank has said the adjustment was part of its effort to revamp the currency regime as it gives market forces more sway in determining the exchange rate.
The yuan decline slowed yesterday after the People’s Bank of China said that there’s no basis for a depreciation to persist and policy makers will step in to control large fluctuations. The currency closed down 0.2 per cent at 6.399 per dollar yesterday in Shanghai, converging to the official fixing of 6.401.
Policy makers may act to ensure that there’s no persistent yuan weakening to encourage local residents to move their savings abroad and accelerate capital outflows, the strategists wrote.
“This probably means that large moves will be avoided going forward,” they said. “The direction of travel will be far from linear.” — Bloomberg
