China sent its most powerful signal yet on its discomfort with the yuan’s weakness by setting its reference rate for the currency with the strongest bias on record.
(Bloomberg) — China sent its most powerful signal yet on its discomfort with the yuan’s weakness by setting its reference rate for the currency with the strongest bias on record.
The People’s Bank of China set the fix at 454 pips stronger than the average estimate in a Bloomberg survey of analysts and traders. The move marks the 11th straight day of stronger-than-expected fixings by the PBOC and follows a reduction in foreign-currency reserve requirements for financial institutions announced Monday, both measures aimed at propping up the currency.
The yuan continued its decline toward the key 7-per dollar level as the greenback pushed higher against global peers. The spread between the onshore yuan and the currency fixing widened to more than 600 pips, the highest since May, in a sign of the bearish sentiment.
“The Chinese authorities are leaving no doubt about their resolve in dampening the depreciation pressure on the yuan,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group. “What is also clear is that the authorities are not seeking to defend any particular level, as the fixings are still being set weaker in the face of dollar strength.”
While the yuan is under pressure as Covid lockdowns in major cities and stress in the property sector weigh on the economy, all Asia’s currencies are feeling the bite of a surging dollar as bets of aggressive Federal Reserve rate hikes mount. For instance, the yen dropped past a key 140-per dollar level, prompting warnings from senior Japanese government officials aimed at stemming the currency’s slide. Authorities from India and South Korea have also come in support of their respective currencies.
While the recent yuan weakness came as a result of continuing, broad-based dollar strength, there are also “more regional momentum and positioning factors in play” as the yen broke a key psychological level at 140, Galvin Chia, a strategist at Natwest Markets.
Still, the depreciation comes at a sensitive time for Beijing, which is preparing for a twice-a-decade party reshuffle next month. That’s why keeping the foreign-exchange market steady is paramount for authorities, as a disorderly plunge in the yuan could spill over to stocks and endanger financial stability. The PBOC fixing limits the onshore yuan’s moves by 2% on either side.
“Stronger-than-expected fixing shows the PBOC’s determination to keep the yuan basically stable ahead of the national party congress,” said Qi Gao, a strategist at Scotiabank in Singapore. “The Chinese central bank will continue to be able to smooth excessive movements in the yuan exchange rate but will not firmly defend a certain level such as 7.”
The PBOC is more concerned about the pace and magnitude of the yuan’s depreciation or appreciation than the currency breaching a specific level against the dollar, the Securities Times says in a front-page commentary Wednesday. As the exchange rate’s two-way moves continue to expand, the yuan at 7 to the dollar may no longer be a focus for the markets in the future even though it’s seen as a key level now, it said.
Despite its drop versus the dollar, the yuan remained steady against a basket of peers — a sign that the depreciation was mostly triggered by a surge in the greenback rather than bearish bets toward China assets. The currency was around the same level seen three months ago against an index of 24 other exchange rates, according to data compiled by Bloomberg.
The offshore yuan fell 0.3% to 6.9900 per dollar while the onshore unit was down 0.3% 6.9781 at 12:19 pm in Shanghai. Data showed China’s exports missed estimates in August and the trade surplus narrowed, which added to bearish bets on the currency.
The selling momentum on the Chinese currency is the most aggressive since May, according to the 14-day dollar-yuan Relative Strength Index. However, there are limited signs of panic, with gauges of expected swings on the yuan remaining low.
The PBOC could use other measures to curb yuan losses, according to Becky Liu, head of China macro strategy at Standard Chartered Bank Plc. It could enlarge the issuance size of offshore bills or slow outbound investment quota approvals, she said, adding that the yuan’s slide could also reduce the near-term possibility for further monetary easing.
(Updates throughout.)
More stories like this are available on bloomberg.com
©2022 Bloomberg L.P.
