Business Maverick

Business Maverick

Yuan shorts gather pace on lockdown threat, property-sector risk

Yuan shorts gather pace on lockdown threat, property-sector risk
A worker uses a smartphone at the construction site of a China Evergrande Group development in Beijing, China, on Thursday, 6 January 2022. (Photo: Andrea Verdelli/Bloomberg)

Investors are turning cautious on China as the economy sputters under the weight of a Covid-Zero policy and deepening turmoil in the property sector, which risks spilling over into the rest of the financial system. While the People’s Bank of China has injected liquidity to soothe markets, sentiment remains fragile.

China’s yuan is under pressure to depreciate as rising Covid cases add to concern over renewed lockdowns, while expectations of aggressive interest-rate hikes by the Federal Reserve boost outflows.

Option traders have increased bearish wagers on the currency as indicated by one-month dollar-yuan risk reversals, which have nearly tripled since the start of July. The cost of shorting the yuan – as measured by offshore yuan tomorrow-next forward points – remains near the lowest since 2020.

Investors are turning cautious on China as the economy sputters under the weight of a Covid-Zero policy and deepening turmoil in the property sector, which risks spilling over into the rest of the financial system. While the People’s Bank of China has injected liquidity to soothe markets, sentiment remains fragile.

“Risks of another bout of USD/CNY upside have risen over more tactical horizons,” Goldman Sachs’ analysts including Kamakshya Trivedi and Danny Suwanapruti wrote in a note. “While the yuan has so far avoided the June and July selloffs of its regional and emerging currency peers, weakness has recently appeared in other Chinese assets and renewed downside risks to Chinese growth have driven yuan-unfriendly shifts in the China-US rate differential.”

A Bloomberg gauge of the dollar rose to a record last week amid bets for a 100 basis-point rate hike by the Fed. Although expectations for policy tightening have moderated since, many in the market still see the US currency marching higher

“We may see the yuan touch 6.80 per dollar if the greenback strengthens further,” said Becky Liu, head of China macro strategy at Standard Chartered Bank (HK) Ltd. 

While cautious over the short term, the bank sees the yuan benefiting from some tailwinds as the year progresses. China’s robust current-account surplus and potential easing of US tariffs will help the currency strengthen to 6.60 per dollar by year-end, Liu said.

The onshore yuan fell 0.1% to 6.7633 per dollar on Thursday. The currency has weakened about 6% this year after gaining 2.7% in 2021, when it was Asia’s top performer.

The pandemic remains a wildcard as China sticks to its Covid-Zero policy. The country reported 826 local Covid cases for Wednesday.

“Any signs of a broader lockdown of a major city such as what was seen for Shanghai could spur larger swings in the yuan,” said Fiona Lim, senior foreign-exchange strategist at Malayan Banking in Singapore. BM

 

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