Yuan Declines for Fifth Week as PBOC Seen Cutting Back Support

(Bloomberg) -- The yuan headed for a fifth weekly decline, the longest run of losses this year, amid speculation the central bank favors further depreciation as it seeks to revive economic growth.

The nation's foreign-exchange reserves unexpectedly increased in June, signaling the monetary authority may have reduced intervention to support the yuan, said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. The currency is also headed for its biggest weekly drop in a month against a trade-weighted basket of 13 currencies, another sign that the People's Bank of China is tolerant of further declines.

The rise in reserves "may show the central bank is gradually exiting control of the exchange rate and moving forward with foreign-exchange liberalization," Ming Ming, Beijing-based head of fixed-income research at Citic Securities Co., wrote in a note. "The quickening depreciation is part of the central bank's plan to take the opportunity to weaken the currency in an orderly, gradual way."

The yuan fell 0.38 percent from July 1 to 6.6876 per dollar as of 10:24 a.m. in Shanghai, extending its decline over the past five weeks to 2 percent. The offshore yuan traded in Hong Kong dropped 0.32 percent for the week, while a Bloomberg replica of the CFETS RMB Index retreated 0.65 percent.

Data released Thursday showed China's reserves rose more than $13 billion to $3.21 trillion last month. The increase shows that the yuan's accelerated declines haven't triggered a vicious cycle of more rapid capital outflows, making it easier for the PBOC to allow further weakness, said Harrison Hu, chief greater China economist at Royal Bank of Scotland Plc.

A measure of expected yuan volatility in the options market was poised for its third weekly drop, a sign speculative shorts remain contained despite the continued weakness. Tighter capital controls imposed since last August's rout as well as a more transparent fixing mechanism have also helped prevent panic. In January, an abrupt weakening of the yuan fixing had fueled fears of a devaluation and roiled global markets.

HSBC Holdings Plc now sees little chance of a return to January's turmoil, while Beijing Gao Hua Securities Co.'s chief China economist Song Yu, the top-ranked forecaster of the nation's economy, says the Chinese currency will be stronger against the basket by year-end.

The PBOC weakened the yuan's daily fixing, which limits onshore moves to 2 percent on either side, by 0.05 percent to 6.6853 a dollar on Friday.

--With assistance from Tian Chen To contact the reporter on this story: Justina Lee in Hong Kong at jlee1489@bloomberg.net. To contact the editors responsible for this story: Robin Ganguly at rganguly1@bloomberg.net.