(Yicai Global) Aug. 16 -- Even as the yuan continues to tumble against the dollar, the Chinese central bank will abide by its pledge not to intervene with the currency, according to several market insiders.
The People's Bank of China pegged the yuan's central parity rate against the dollar at 6.93 yesterday. It sets the rate every business day, and spot rates may deviate 2 percent above or below the figure. In offshore trading, the yuan slipped to 6.94, a new low since last May, while the dollar index rises to a 14-month high.
The stronger dollar is not necessarily the reason behind the yuan's softening, foreign exchange expert Han Huishi told Yicai Global. Currencies from emerging markets are generally more volatile, and China's macroeconomic data for July was weaker than expected, which dampened investors' enthusiasm for the redback, he added.
But Ji Tianhe, an interest rate and forex strategist with BNP Paribas China, disagrees. He believes that the rallying dollar is at the heart of the yuan's decline and that the value of the currency itself has not declined.
Almost all currencies have weakened against the dollar Ji said, pointing to the Turkish lira's recent tanking and the pound and euro, which have both hit 12-month lows against the greenback.
The ongoing decline of the yuan has put all eyes on the Chinese central bank, to see whether or not it intervenes to strengthen its currency, but both Ji and Han feel it will remain hands off.
Regulators have never based forex decisions based solely on exchange rates, Han said, adding that these decisions are made after considering forex sales and settlements as well as other market factors, such as macroeconomic data on imports and exports. The likelihood of the central bank changing its policy increases only if exchange rate fluctuations result in substantial deficits or surpluses in lenders' foreign exchange sales and settlement balance, he said.
"The principle of bilateral fluctuations does not imply any price floor against the dollar," Han added. "If the dollar rallies further, but foreign exchange sales and settlement are still a relatively balanced level without causing a significant deficit, the yuan-dollar exchange rate might pass 7."
Chinese banks registered a foreign exchange surplus of USD1 billion in June, according to data from the National Bureau of Statistics.
Given the fall in other currencies against the dollar, the yuan is unlikely to rally alone, said Zhao Qingming, chief economist at the research institute under the China Financial Futures Exchange. The 6.9 mark is not critical, he added, saying that 6.96, the lowest point after the yuan's last major devaluation, could be an important threshold.
"General market consensus is that if the yuan's devaluation remains within a reasonable range, it will have a positive effect in terms of exports and offsetting the impact of trade frictions," he Zhao said. "But excessive weakening and the resulting pessimistic sentiment may lead to greater adverse effects on the macro economy."
Though many are happy to see PBOC sitting back, Xiao Lisheng, head of global finance at the Institute of World Economy and Politics, wants to see immediate action.
In the past, large volumes of short-term funds flew in every time the yuan approached 7 versus the dollar, Xiao said, adding that if the central bank does not intervene, devaluation expectations may build up further. He wants resistance between 6.95 and 7 so short-term speculators will tire and reduce the symbolic implications of the threshold.
The yuan hit a more than eight-year low of 6.96 in November 2016, but rebounded to a 31-month high in March this year, 6.2353, before a trade tiff with the United States and a rallying dollar sent it freefalling.
Editor: James Boynton