On Monday, China’s central bank, the People’s Bank of China (PBOC), intervened to pull the yuan away from its 16-year low against the dollar. The PBOC established a daily midpoint guidance rate, which dictates the yuan trade range. The new rate was set at 7.2148 yuan per dollar, indicating a stronger bias than the previous fix of 7.2150. This move signifies the PBOC’s growing unease with the recent currency depreciation.
China’s central bank sets a strong daily fixing rate
The onshore yuan experienced an increase for the first time in seven sessions, rebounding from its weakest point since 2007 last week. The People’s Bank of China (PBOC) set a stronger daily fixing rate than expected, and state-owned banks were reportedly actively selling dollars, as reported by anonymous traders.
The significantly stronger midpoint fixing played a role in limiting the potential for further yuan depreciation. The lower boundary of the daily trading band is capped at 7.3591 yuan per dollar. Bruce Pang, the chief economist at Jones Lang Lasalle, noted that the wider fixing gap suggests that Chinese authorities are demonstrating their determination to prevent the yuan from depreciating further, using policy gestures to shape market expectations towards a milder depreciation.
Christopher Wong, an FX strategist at OCBC in Singapore, also commented on Monday’s fixing, emphasizing policymakers’ commitment to curbing yuan depreciation pressure. However, whether this marks a genuine turnaround or results from economic support measures remains uncertain.
Several factors have weighed on the onshore yuan, including China’s gloomy economic outlook, interest rate differences with the United States, and signs of easing factory deflation in August. Additionally, a positive report on credit growth and a yen rally that influenced the dollar may have contributed to the Chinese currency’s recent performance.
Despite the efforts of the PBOC to support the yuan, many experts believe that the central bank will focus on slowing the pace of declines and is unlikely to take drastic measures to reverse the weakening trend. They anticipate potential challenges for the yuan in the near term, citing uncertainties surrounding the Federal Reserve’s monetary tightening, the divergence in Sino-US policies, and the dampening global risk appetite.
Concerns for China’s slowing economy
Earlier, US Treasury Secretary Janet Yellen remarked that China possesses the “policy space” to address its economic slowdown. China’s slowing economy has raised concerns for the global economy during the G20 summit, where Yellen stated that she doesn’t anticipate the Chinese slowdown to have a very significant direct impact on the United States but noted that countries in East Asia may be more susceptible.
Beijing has refrained from implementing large-scale fiscal stimulus or a bailout for the struggling property sector. However, it has reduced benchmark lending rates as part of its efforts to restore confidence. Beijing’s lack of concerted effort has contributed to the downward pressure on the yuan.
Meanwhile, in the spot market, the onshore yuan started at 7.3416 per dollar and was trading at 7.3245 at 0210 GMT, showing a 205 pips increase from the previous late session close. The spot rate hit a low of 7.3510 per dollar last Friday, a level last observed during the global financial crisis, marking a 6.1% decline since the beginning of the year. The offshore yuan followed suit, rebounding to 7.3419 per dollar as of 0210 GMT, compared to the previous close of 7.3648.
Analysts at HSBC noted that there would be increased scrutiny on whether the PBOC intensifies its defense as the spot yuan is on the verge of reaching new cycle highs or if it opts to adjust the USD/CNY fixing and again reduces the medium-term lending facility (MLF) rate.
Approximately 400 billion yuan (about US$54.61 billion) worth of medium-term policy loans are set to mature on Friday, and it is widely expected that the PBOC will choose to renew them. Additionally, currency traders highlighted that market participants will closely monitor a series of economic data scheduled for release this week, including August credit lending and activity indicators, to gain further insights into the condition of the Chinese economy.
