(Bloomberg) -- It's a new year and a new yuan.
Days after announcing a revamp of its trade-weighted foreign-exchange basket, China's decision to downgrade the importance of the U.S. dollar is sparking debate among yuan-watchers over whether Beijing can project an image of stability in its currency after a year of depreciation.
Analysts from Barclays Plc to Citigroup Inc. to Societe Generale SA have differing opinions over whether the new currency basket will prove less volatile than its older version. Effective from Jan. 1, the weighting of the greenback has fallen to 22.4 percent from 26.4 percent in the basket set by the China Foreign Exchange System, while 11 new units — including South Korea's won, Turkey's lira and Poland's zloty — have been added to the group.
The move comes at a time when outflows have been accelerating, the country's foreign-exchange reserves have been sliding, and the dollar — the dominant reference currency for the yuan from the perspective of financial markets — has staged a sharp appreciation.
"Chinese capital outflows haunted the beginning of 2016 — and are now haunting the end of the year as well," according to CreditSights Inc. analysts. Meanwhile, Macquarie Group Ltd. analysts argue that China's reserves may drop below $3 trillion when data for December is published on 7. Jan, putting fresh pressure on the currency.
To Goldman Sachs Group Inc., the expansion of the benchmark index appears effective as it "appears to have mitigated the market's concern about a sharp one-off [yuan] devaluation risk." The new basket "would have shown somewhat less depreciation, falling 2.4 percent in 2016 vs. 3.7 percent actual performance, and it would also have shown less volatility," Goldman analysts including MK Tang and Yu Song said in the research note.
Analysts at Barclays agreed that while the new basket is "not markedly different" compared to the 2016 version, the dilution of the dollar's role, by virtue of the addition of new entrants, does mean that the yuan is "less volatile."
"We estimate that the revised index is currently around 1 percent higher than the existing CFETS index and also has been relatively stable over [the second half of 2016] — but in an even narrower 1.25-point range," the analysts led by Mitul Kotecha and Dennis Tan wrote in a note.
Others hold a different view, with Siddharth Mathur at Citigroup arguing that the revision will have "a negligible market impact" as the overall performance of the 2017 index is "nearly identical" to the old version and that "the effective compositional change is smaller than it appears."
Rather, the fact that the relatively volatile Korean won now accounts for 10.77 percent — or almost half of the greenback's weight — will make the refreshed yuan "somewhat more volatile," he argued.
Jason Daw at Societe Generale agrees that the impact of the new basket will be "inconsequential," affirming that the update won't change his forecast that the yuan will depreciate to as low as 7.3 against the U.S. dollar by the end of 2017.
"If the authorities want to keep the basket stable, a stronger U.S. dollar mechanically requires a modestly weaker [yuan] in the new basket, but the difference is minuscule," Daw wrote in a note to his clients. "The volatility pattern of the old and new index is very similar over time," he added.
To contact the author of this story: Narae Kim in Hong Kong at nkim132@bloomberg.net.
To contact the editor responsible for this story: Tracy Alloway at talloway@bloomberg.net, Sid Verma
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