Analysis: Yuan Swings Rekindle Worries Over Asia’s Vulnerabilities

Yuan banknotes are seen in this illustrative photograph taken in Beijing July 26, 2010. REUTERS/Jason Lee

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SINGAPORE/BENGALURE, Feb 15 (Reuters) – The Chinese yuan’s decline from a nearly four-year high has raised market fears that a recent period of stability may end, which could expose peers in the region , especially as US interest rates begin to rise.

A stable yuan, along with robust exports and foreign exchange reserves, have helped shield emerging markets in Asia from the type of exodus typically seen when developed market interest rates rise.

Still, slowing economic momentum and policy easing in China, amid expectations of as many as seven U.S. rate hikes this year, have clouded the outlook for the yuan, a wind historically bad for neighbors.

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“The yuan has played a key role in stabilizing Asian currencies in 2021 and has even outperformed the dollar,” said Claudio Piron, co-head of Asia fixed income and foreign exchange at Bofa Securities in Singapore.

But political headwinds may slide it about 5% to 6.70 to the dollar this year, he predicts.

“This depreciation of the yuan will have negative repercussions on Asian currencies, in particular the South Korean won and the Taiwanese dollar.”

Already, volatility has returned for the yuan, which suffered its biggest selloff in seven months when it fell sharply against the dollar on Jan. 27. The yuan is stable for the year so far, at around 6.36 to the dollar.

A long rally in the Taiwan dollar has also come to a halt and the South Korean won is down and under pressure.

“The reasons that supported the yuan despite a weak economy are fading,” said Ken Peng, head of Asia investment strategy at Citi Private Bank in Hong Kong.

“Bond inflows have already fallen sharply as positive carry has disappeared,” he said, and the trade surplus will likely shrink from record highs, leaving the yuan vulnerable, he believes. to a drop to 6.50 to the dollar this year.

Foreign holdings of Chinese bonds hit a record close to $400 billion last month, but flows have slowed as the spread between Chinese and US 10-year yields has nearly halved since December. Read more


Analysts say a stable yuan provides a pillar of fundamental strength in the region as it reflects a strong Chinese economy. This is seen as a positive for Asian exporters, reducing the immediate need for competitive currency devaluation.

While China’s central bank has pledged to maintain currency stability, authorities have also stressed the need to prepare for two-way volatility and analysts expect the downward pressure to continue. intensifies as US interest rates rise.

Previous episodes of weakness, such as a devaluation to support the economy in 2015 or its fall due to trade tensions in 2018, have generally led to pressure on currencies, including the Thai baht, Malaysian ringgit, Indonesian rupiah and the Singapore dollar.

“If the yuan becomes more volatile, it would likely lead to a reduction in foreign flows to China and likely hurt overall flows to Asia,” said Mitul Kotecha, emerging markets strategist at TD Securities in Singapore.

He doesn’t expect a repeat of the regional contagion seen in 2015, as China’s capital outflow controls have since tightened, but he noted that the Philippines and Thailand appear most vulnerable to the drying up. foreign flows.

So far, the yuan has stopped rising rather than falling, and riskier corners of the region, such as Indonesia, have been remarkably resilient – a far cry from the fall in emerging markets in 2013 when the rupiah dropped 17% in five months.

Indeed, Citi’s Peng sees domestic factors as more relevant than any drag on the yuan and BofA’s Piron thinks a Chinese economic recovery may provide some support. Inflation also weighs less on Asian economies with faster growth.

Still, the pressure could mount very quickly if the Federal Reserve starts raising rates as fast or faster than the futures markets imply, and the data suggests that foreign equity investors who have remained in the region have already spent the last month to vote with their feet.

January outflows from Asia were the largest in six months, dragged down by $4.4 billion of depletion in Indian stocks. Read more

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Editing by Vidya Ranganathan and Sam Holmes

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