Economic slowdown, US QE tapering frustrate strong yuan

The value of the Chinese currency Renminbi, or the yuan, weakened 43 basis points to 6.1146 against the U.S. dollar on Thursday, according to the China Foreign Exchange Trading System. It marked the third straight day the central parity rate of the yuan has fallen against the greenback. It fell 20 basis points on Tuesday and dipped another 30 points on Wednesday. Thursday's exchange rate also marked a lowest reading against the dollar since the beginning of the year, even though the yuan surged to a historical high of 6.093 against the U.S. currency on Jan. 14. Analysts said the recent decline of the yuan concurred with big banks' buying of foreign exchanges amid concerns of an economic slowdown, as investors, who used to be overly optimistic on the yuan's appreciation, are starting to restructure strategies. Chinese economic growth eased to 7.7 percent in 2013 compared to 7.8 percent in 2012. A report released by Xiamen University on Thursday forecast growth will further slow to 7.62 percent in 2014. Leading economic indicators such as the purchasing managers' index for the manufacturing sector, dropped to a six-month low of 50.5 percent in January, marking a bumpy start for the Chinese economy in 2014. Lian Ping, chief economist at the Bank of Communications, said that China's foreign trade looks to turn more balanced, which will put less pressure on the yuan's appreciation. Meanwhile, the United States' tapering of its quantitative easing also does not support the continuous and sharp gains of the yuan. Zong Liang, an international finance researcher at Bank of China, said that capital is flowing back to developed markets from emerging markets, after the U.S. started to wind down assets purchase by 10 billion U.S. dollars each month starting in January. Zong said that the QE tapering has led to sharper fluctuations of exchanges rates in emerging markets, and also brought about depreciation expectations of the yuan. The Philippine's central bank said on Saturday that the Fed's decision resulted in a massive outflow of foreign portfolio investment from the country in January as "investors started to divert funds back to the U.S.". However, analysts said the tapering may also prove a valuable opportunity for China to progress reforms of the yuan's exchange rate regime. China's central bank announced in mid-2010 that it would further promote the reform of the RMB (yuan) exchange rate regime and increase the flexibility of the RMB exchange rate. The Chinese central bank also said on Wednesday that it will gradually improve the yuan exchange rate formation mechanism and widen the bands for the yuan's floating. In China's foreign exchange spot market, the yuan is allowed to rise or fall by 1 percent from the central parity rate each trading day. The central parity rate of the yuan against the U.S. dollar is based on a weighted average of prices before the opening of the market each business day.