China’s yuan hits 1-month low, weighed by property woes

HONG KONG: China’s yuan weakened to a one-month low on Friday though trading was confined to a tight range, as the deteriorating health of the country’s debt-laden property developers deepened concerns about the overall economic recovery.

The sector, which accounted for a quarter of China’s economy, sank deeper into trouble this week after Country Garden on Thursday forecast a steep loss for the first half this year.

Bonds and shares of some Chinese developers have fallen sharply in recent weeks and pulled down broader investor sentiment.

The latest disclosure followed a Reuters’ report earlier this week that it had not been able to make $22 million in dollar coupon payments, deepening contagion worries in a sector that has already seen many company defaults.

That report comes amid wider worries about the economy, which tipped into deflation in July, according to data released this week.

“Unless there are supporting measures on the horizon that would be as comprehensive as the liquidity support package outlined in the 16 steps in November last year, anything less than that would not alleviate the pressure on the yuan,” said Ken Cheung, chief Asian FX strategist at Mizuho.

He was referring to the 16 steps announced by the People’s Bank of China and the banking regulator.

The PBOC set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1587 per U.S. dollar prior to market open, weaker than the previous fix 7.1576 but about 600 pips stronger than market consensus.

The spot yuan opened at 7.2246 per dollar and was changing hands at 7.2295 at midday, 118 pips weaker than the previous late session close and 0.99% weaker than the midpoint.

For the week, the yuan has weakened 0.8% by midday. The dollar index rose to 102.57 from the previous close of 102.524.

U.S. consumer prices increased moderately in July, as the annual increase in prices excluding the volatile food and energy components, or core inflation, was the smallest in nearly two years.

The trend could persuade the Federal Reserve to leave interest rates unchanged next month. The CPI advanced 3.2% in July year-on-year.

That followed a 3.0% rise in June, which was the smallest year-on-year gain since March 2021. The offshore yuan was 0.17% weaker than the onshore spot at 7.2421 per dollar.

Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 7.0238, 1.92% away from the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate. – Reuters