The yuan will start to weaken after Chinese policy makers boosted the official exchange rate to a record high, as measures to slow credit growth ease, said Amer Bisat, a money manager at hedge fund Traxis Partners LP.
“We are not far away from the point where they can take their foot off the brake,” said Bisat, a former International Monetary Fund economist who joined Traxis, the $1.2 billion hedge fund started by Barton Biggs, in 2007.
The central bank increased the currency’s reference rate 0.01 percent to an unprecedented 6.1598 per dollar yesterday, as part of government efforts to slow lending that expanded a record 36 percent in March, according to Bisat. The yuan, which is allowed to trade a maximum 1 percent on either side of the fixing, rose the most in three weeks, adding 0.09 percent to 6.125 per dollar, according to China Foreign Exchange Trade System prices. The currency is up 1.7 percent this year, the most among 24 emerging-market currencies tracked by Bloomberg.
A measure of interbank funding costs increased to the highest since 2006 this month on speculation that Chinese authorities are moving to rein in credit to avoid bad loans. Total lending rose 2.5 trillion yuan ($408 billion) in March, generating concern some of the loans may turn sour as banks loosen standards.
“We are in a moderately tightening cycle,” said Bisat, “The strengthening of the fixing is part of that story.”
Three-month non-deliverable yuan forwards were at 6.1890 at 5 p.m. in New York.
The seven-day repurchase rate, a gauge of interbank funding availability, has averaged 6.03 percent in June, the highest since the National Interbank Funding Center began compiling a weighted average in 2006.
Aggregate financing totaled 1.19 trillion yuan in May, the lowest in three months, falling short of a median forecast of 1.6 trillion yuan in a Bloomberg survey of nine economists.
Moody’s Investors Service lowered its outlook for China’s sovereign credit rating in April to stable from positive, citing a lack of reforms in reducing risks from local-government debt and credit expansion.
Financial conditions are tightening when growth is already slowing. China’s industrial output growth eased to 9.2 percent from a year earlier in May, less than the 9.4 percent forecast in a Bloomberg survey of economists. Exports (CNFREXPY) rose the least in 10 months and factory-gate prices fell for a 15th month, official figures released this month show.
With economic expansion tapering off, the yuan may weaken from here, Bisat said.
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