China Boosts Yuan Support With Warning, Capital Control Tweaks
China Boosts Yuan Support With Warning, Capital Control Tweaks ·Bloomberg
Bloomberg News
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(Bloomberg) -- China has ramped up its support for the yuan with tweaks to its capital controls and a vow to crack down on market disruption, after the currency dropped close to a record low against the dollar in offshore trading.
The People’s Bank of China and other regulators pledged to strengthen their management of the foreign-exchange market, deal with any behavior that may disrupt the market and prevent the risk of a large move in the yuan. Beijing will make sure the currency is basically stable at reasonable levels, the central bank said in a statement.
The PBOC also adjusted its rules for cross-border flows on Monday, allowing firms and financial institutions to borrow more from overseas, which may help increase capital inflows and support the yuan. And the central bank issued a daily reference rate at a level much stronger than analysts’ estimates, sending its most forceful signal since April that it intends to stabilize the exchange rate.
The moves helped the yuan defy a wider selloff among Asian currencies against the greenback on Monday. The offshore yuan was trading around 7.356 per dollar in morning trading, around 0.1% stronger. But the currency is still trading near an all-time low, following a monthslong decline against the greenback.
Monday’s pledges and policy changes underscore the increasing sensitivity of Chinese policymakers to the weakness of the yuan, which is often seen as a gauge of confidence in the world’s second-largest economy. Although a weaker currency would in theory help the economy by boosting exports, Beijing has consistently stressed the importance of a stable yuan — even in the face of a blistering dollar rally.
Tight Grip
The escalation of the PBOC’s battle against yuan bears suggests China is not yet ready to let go of its tight grip on the currency, despite pressure from a yawning interest-rate discount to the US, looming tariff threats and a sluggish local economy.
Chinese officials are worried about disorderly capital outflows that could accompany a selloff of yuan assets, something that could lead to financial instability and derail an already lackluster recovery.
Still, investors expect the PBOC to eventually allow weakness if president-elect Donald Trump slaps higher tariffs on Chinese exports. The Federal Reserve’s caution over future interest-rate cuts amid strong US data at a time when the PBOC is expected to ease its policy further is also pressuring Beijing to give in.
“For now, yuan stability remains a priority,” said Tommy Xie, head of Asia macro research at Oversea-Chinese Banking Corp. However, “in the medium term, the success of this strategy will hinge on economic fundamentals,” he said.
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In a statement citing a meeting of China’s top FX regulators, the PBOC said traders should refrain from aggravating pro-cyclical behaviors in the market — in other words, fueling market swings — and they should try to maintain orderly and standardized operations.
Shortly after the statements were released, PBOC governor Pan Gongsheng reiterated the goal of keeping the yuan at reasonable equilibrium levels in a speech at the Asian Financial Forum in Hong Kong. China will also implement more proactive macroeconomic policies and make use of tools including adjustments in interest rates and reserve-requirement ratios to maintain ample liquidity, he said.
“The yuan is fully capable of maintaining basic stability as fundamentals of an economic recovery in China will not change, while balance of international payments will remain overall balanced,” Pan said. “The foreign-exchange market is also seeing increased resilience.”
To encourage more inflows, the PBOC on Monday raised the so-called macro-prudential parameter, part of a calculation limiting how much companies and financial institutions can borrow overseas. The central bank increased the parameter to to 1.75 from 1.5, its first increase since July 2023.
It also issued a daily fixing, which limits moves in the onshore yuan by 2% on either side, at a level that was more than 1,500 pips stronger than the market had forecast. That was the largest strong bias since April and second widest gap to the estimate since Bloomberg initiated its survey with analysts and traders in 2018.
Digging Deeper
The PBOC has dug deeper in its toolkit of currency support due to intensifying depreciation pressures this month.
The central bank is planning to issue a record amount of bills in Hong Kong this week, a move that will mop up offshore liquidity and drive up demand for the currency. It has also suspended government bond purchases, which can help slow relentless drops in China yields and narrow its interest-rate discount to the US.
State-owned banks last week scaled back their yuan lending in Hong Kong, making it costlier for investors to build short positions, according to traders.
The weak currency creates a conundrum for the central bank, which has taken multiple steps to ease monetary policy in an effort to boost the economy. The central bank may be delaying further cuts to interest rates or banks’ required reserve ratios to avoid dragging the yuan lower, according to analysts.
“Pressure from US dollar is making it hard for PBOC to deliver easing required“, said Frederic Neumann, chief Asia economist at HSBC. The PBOC isn’t alone in facing this dilemma, he said.
Analysts expect data to be released this Friday to show a rebound in the nation’s growth in the fourth quarter, which can push its full-year expansion to 4.9% — in line with Beijing’s target of around 5%. But the growth outlook for 2025 is gloomier, due to the threat of higher US tariffs, persisting deflation and a property downturn that has yet to bottom out.
The measures “will likely to offer some support for the yuan in the near-term, though it does little to change the factors which have contributed to depreciation pressure,” said Lynn Song, chief greater China economist at ING Bank. “Our view is that the dollar-yuan will remain a relatively low volatility pair compared to other Asian currencies.”
