Yuan extends decline amid policy hopes

A $100 banknote is placed next to 100 yuan banknotes in this October 16, 2010 file picture illustration taken in Beijing. [Photo/Agencies]

China's yuan extended a decline from the lowest level in more than two years amid speculation the government will take further steps to support the economy after cutting interest rates for the second time in three months.

The People's Bank of China may lower borrowing costs before May and reduce the ratio of deposits that lenders must set aside, according to the Industrial and Commercial Bank of China Ltd and China Merchants Bank Co Ltd.

"The yuan is becoming less and less attractive compared with the dollar," said Xiang Chu, a Shanghai-based foreign-exchange analyst at Industrial Bank Co. "Investors are expecting the government to announce more easing policies, which will lead to further yuan depreciation. And that is encouraging them to sell the yuan."

The yuan fell 0.02 percent to close at 6.2743 a dollar in Shanghai on Tuesday, extending a three-day loss to 0.25 percent, China Foreign Exchange Trade System prices show. It reached 6.2740 on Monday, the weakest level since October 2012.

The yuan traded at a 1.95 percent discount to the central bank's fixing, near the 2 percent limit. The PBOC cut the currency's reference rate by 0.05 percent to 6.1543, the lowest level since November 2014.

China may cut banks' reserve requirement ratios and interest rates to avoid deflation and boost trade figures, Liu Dongliang, a senior analyst at China Merchants Bank, wrote in a note on Tuesday.

The nation may lower the RRR in the first half and in the second, and cut interest rates in the second, Yang Xing, a researcher at ICBC, wrote in a commentary in the Shanghai Securities News. The PBOC cut interest rates late on Saturday, after a reduction in November.

The yuan is the world's strongest currency after the dollar, Yi Gang, a deputy governor at the PBOC, said on Tuesday as officials from around the country gathered for annual parliamentary meetings in Beijing.

China's currency has been "very stable", Yi, who is also head of the State Administration of Foreign Exchange, said in a short interview. Asked if the yuan would weaken further, Yi said it "will remain very stable in the future".

The authorities could widen the yuan's daily trading band to 3 percent and allow it to weaken as deflationary pressures build, according to Credit Suisse Group AG and Commonwealth Bank of Australia.

The currency closed within 0.03 percent of the weak end of its range in each of the last six sessions. A further widening would allow depreciation that supports exports, although it runs risk of spurring capital outflows.

Consumer prices rose 0.8 percent in January from a year earlier, the least in more than five years.