China sets yuan at weakest level since 2011

Move comes as Beijing bows to investor pressure to deliver on pledge of more market-driven yuan.

China sets yuan at weakest level since 2011

China guided the yuan to its weakest level in more than four years as the country deals with currency outflows and a slowing economy while trying to loosen its grip on the exchange rate. 

Investors have expected the yuan to weaken as Beijing works to boost an economy hurt by a relatively strong currency. Beijing is also bowing to investor pressure to deliver on its pledge of a more market-driven yuan, while trying to avoid a repeat of mistakes like its market-roiling summer devaluation. 

China set the yuan at 6.414 to the US dollar Wednesday, its weakest level since August 2011, continuing a month-long trend and following the market's lead. In the past the setting didn't always coincide with where the yuan had last traded in the market, as the central bank tightened its grip to stabilise the currency. 

The yuan has lost as much as 3.4 per cent of its value since August 10, the eve of the 2 per cent devaluation. 

"What has happened in the past few days shows a clear intention from the authorities that they would like to see an orderly and mild depreciation of the yuan," said the head of trading at a Guangzhou-based, state-run bank. "Everything, ranging from the dismal trade data to the prospect of a Fed rate hike, calls for a weaker yuan. If you ask 10 traders in China, nine will tell you that they expect the currency to depreciate in the near term." 

Data earlier this week showed China's foreign-exchange reserves fell in November to their lowest level in over two years, dropping $US87.22 billion to $US3.438 trillion. 

Economists and investors say Beijing may not be able to resist the mounting depreciation pressure on its currency, given the capital outflows. In recent months, Beijing has used various ways to intervene to provide traders with forward guidance. 

Stephen Jen, founder of SLJ Macro Partners LLP, a London-based hedge fund says China's pent-up demand for foreign assets "must be satiated sooner or later." 

As China evolves "from the world's largest exporter of goods to a large exporter of capital" it seems the yuan should continue to depreciate, he says. 

"We could debate on the timing and the pace of this trend, but the direction of the trend seems to be clear," he wrote in a note to clients on Tuesday. Like other emerging-market currencies facing pressures from a strengthening US dollar and the prospect of rising US interest rates, he added, China's yuan should depreciate "due to capital account reasons, not current account reasons." 

Beijing has few options: Continue to lean on its foreign-exchange reserves, let the currency fall in an orderly manner or let the currency fall freely and lose enough value to absorb the rising economic pressures. 

Last week, the International Monetary Fund said it would include the yuan in its elite basket of reserve currencies, the Special Drawing Rights, along with the US dollar, the euro, the pound and the yen. While some critics worry that Beijing now has free rein to lets its currency fall to make its monetary policy more effective, China has vowed to communicate better with financial markets. 

The IMF action is merely symbolic at this point -- the yuan won't be added to the emergency lender's basket till October 2016. 

At a press briefing after the IMF's inclusion announcement, People's Bank of China Vice Governor Yi Gang said Beijing will continue to keep its currency "stable at a reasonable and equilibrium level," intervening only to smooth excessive volatility. 

The low setting Wednesday didn't trigger any sharp selling in the yuan traded onshore, which fell as much as 0.14 per cent. The yuan traded offshore, which has lost 0.6 per cent of its value over the past three days, was last down 0.04 per cent.