China central bank seen ready to intervene again if offshore pushes yuan too far

Fri Sep 11, 2015 6:08am EDT
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By Michelle Chen

HONG KONG (Reuters) - A spike higher in the offshore yuan following suspected rare intervention by Chinese state banks is expected to be short-lived, especially with a looming U.S. interest rate rise likely to add to the attraction of owning dollars.

But those betting on a further depreciation in the yuan are likely to have only limited room to push the offshore rate down relative to the onshore rate without drawing the ire of the Chinese central bank and the risk of further state intervention, market sources said.

"The central bank will not stand aside if depreciation expectation is formed again and more intervention may happen," said a Hong Kong-based currency trader, who declined to be identified.

The offshore yuan CNH=D3 shot up by more than 1 percent on Thursday on suspected intervention that was seen by traders as a gesture by authorities to shake out speculators betting against the yuan.

Authorities have spent the country's foreign exchange reserves heavily to hold the yuan steady onshore since a surprise devaluation in August prompted fears the Chinese economy was in worse shape than previously thought and that the yuan therefore could fall further.

Thursday's spike narrowed the offshore yuan's discount against the onshore rate to 0.38 percent from 1.56 percent on Wednesday and forced traders with short positions to cover. Traders suspect the sudden move was prompted by buying by state banks at the behest of the central bank.

"The Chinese central bank's purpose was to narrow the gap between the offshore and onshore rates, but I don't see any fundamental that supports yuan appreciation against the dollar going forward," said Penny Chen, a fixed-income fund manager at Manulife Asset Management in Taiwan.

Since the Aug 11 devaluation, several investment banks, including Goldman Sachs, Morgan Stanley and UBS, have revised down their forecasts for the yuan's performance this year.   Continued...

A customer counts Chinese Yuan notes at a market in Beijing, August 12, 2015. REUTERS/Jason Lee